Mumbai: A combination of the recent drought in the primary market and regulatory tightening has forced some top investment banks to increase their advisory fee for public floats, while smaller advisory units have made the best of the dry weather.
Some top merchant banks engaged by companies to sell their equity shares in initial public offerings, or IPOs, have increased their fee to 4-5% of the funds raised from the market, from about 2% earlier.
The difficulty in finding and convincing potential investors in a bearish market has led to the increase in fee, some bankers said, but they did not want to be named.
The increase is also a result of steps take by market regulator Securities and Exchange Board of India (Sebi) to curb the interest income enjoyed by these banks on investor deposits during an IPO, they said. Advisory units with bank parentage were earlier able to agree to manage issues even for free.
The equity capital market (ECM) volume for April was the lowest since 2003, according to a report by Thomson Reuters.
Many IPOs are ready to hit the market but they “could be delayed till next year” if the market remains bearish or flat, said the head of an IPO advisory at a large domestic investment bank. He did not want to be identified.
RITES Ltd, a state-owned consultancy firm that specializes in transport and infrastructure, could be the first of the relatively big IPOs to hit the market later this year, some of the bankers mentioned earlier said.
RITES plans a Rs400 crore IPO, which will be managed by Enam Financial Consultants Pvt. Ltd, Kotak Mahindra Capital Co. Ltd and ICICI Securities Ltd (I-Sec).
The bearish market also means company valuations of some large IPO projects (above Rs1,000 crore) are posing a challenge to merchant banks.
Sahara Prime Ltd, the real estate division of the Sahara Group, is a prime example.
The stock price of the country’s largest real estate company, DLF Ltd, is around Rs600, about half its 52-week high of Rs1,225.
The benchmark index of the Bombay Stock Exchange (BSE) Sensex is still down 15%, after sliding about 30%, this year from an all-time high in January.
However, there could be a flood of primary issues when the market turns around, as several of these banks have a deal pipeline that has swelled with projects waiting for the bearish trend to change.
Vallabh Bhansali, chairman of investment bank Enam Group, had predicted a “bumper year for IPOs in 2009” during a conference in Mumbai.
Meanwhile, smaller advisory firms and some new players have taken advantage of the trough in the market, as the advisory list of primary market issues since March indicates.
Religare Securities Ltd, a subsidiary of Religare Enterprises Ltd, debuted its IPO services with the GSS America Infotech Ltd issue in March.
The “markets were in good shape” when the GSS mandate was taken, said Kiran Vaidya, president group mergers and acquisitions, Religare Enterprises.
However, even after its success with the GSS issue, Religare has stalled other IPO projects in its pipeline, waiting for the market trend to reverse.
Early this year, Emmar MGF Land Ltd and Wockhardt Hospitals had become two high-profile IPOs to be withdrawn for lack of investor interest.
Meanwhile, some lesser known advisory firms including Allbank Finance Ltd, Intensive Fiscal Services Pvt. Ltd and Ashika Capital Ltd have clinched IPO mandates since March, as have smaller IPO advisory teams from players such as Anand Rathi Securities Ltd, Keynote Corporate Services Ltd, Almondz Global Securities Ltd and Centrum Capital Ltd.
Niraj Cement Structurals Ltd, whose public offering could hit the market later this month, is being advised by Allbank Finance.
Aishwarya Telecom Ltd, the only firm that listed on the country’s exchanges so far in May, was advised by Srei Capital Markets Ltd and Sobhagya Capital Ltd.
The big players are “increasing their bar” and are not looking at smaller deals anymore, said Harjit Singh Sethi, chief executive, Almondz Securities Ltd.
The IPO registry services business, largely dominated by one player—Karvy Computershare Pvt. Ltd—has also seen increased competition.
Among the 10-odd issues since March, Intime Spectrum Registry Ltd was chosen as registrar by three issuers and Bigshare Services Ltd handled two issues, while Cameo Corporate Services Ltd and Ankit Consultancy Pvt. Ltd acted as registrar to one issue each.