The government seems to think that the reason for the tepid response to its disinvestment programme lies in not paying sufficient commissions to brokers and fees to investment bankers. That is why it is changing the norms for selecting investment bankers by giving more weight to technical expertise.
But the lead managers to the government’s recent divestment issues have all been investment bankers of repute. That suggests factors such as track record, ability to handle large issues, geographical reach and the like must also have played a part in their selection. Surely, it’s common sense for these factors to be considered? But if the investment bankers selected have all been well-known firms, it begs the question about what exactly the government will gain by paying them higher fees. After all, nobody is forcing the bankers to bid low—the reason they do so it to push up their positions in investment banking league tables and to be able to tell the world that they’ve handled large issues. Their reputation is involved in the deal and it’s unlikely that they will not push the issue just because their fees aren’t good enough.
Brokers’ commissions are another matter. There is enough evidence to show that mutual funds are feeling the heat after the Securities and Exchange Board of India moved to ban commission on their sales. In fact, the mutual fund industry is up in arms against the payment of commissions on unit-linked insurance plans (offered by insurance firms), and complains that brokers push only these. If commissions are now offered for IPOs of government companies, they will have another reason to complain. There needs to be one rule for commissions across financial products.
But apart from that, is the government saying there is no way to sell shares of firms it owns other than by providing incentives to brokers? Are these issues so bad that they have to be pushed hard? It’s also useful to remember that the commission will be paid for by the company, so it’s money that belongs to the investors.
The matter is actually very simple. If the government wants to sell its shares, all it has to do is lower the pricing. The huge oversubscription to the recent public sector United Bank of India IPO is proof of that. Lower pricing will attract investors, stoke an appetite for such issues, expand the market and create the goodwill that will stand it in good stead in future divestments. Everything else is peripheral.
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