Mumbai: The disinvestment ministry may soon stop awarding the management of public issues to the lowest bidders in favour of negotiated deals with investment banks.
The change, likely to be effected after the Union Budget next month, will come as a relief for investment bankers, who have until now been bidding to become the lead managers of public issues at zero commission.
“We have written to the vigilance (Central Vigilance Commission) last week,” said Sidhartha Pradhan, joint secretary, disinvestment ministry. “After we get a clearance, we will move ahead.”
Currently, the government follows a two-round bidding process to choose lead managers, or banks that have the primary responsibility for organizing a divestment programme.
In the technical round, applications from investment banks are shortlisted after measuring them on eight broad parameters, including sector expertise, understanding of the company, experience in handling similar transactions, distribution network and research capability.
The winner is selected in the next round on the basis of financial bids. As competition is fierce, many investment banks show very little by way of issue expenses.
Being the lead manager of a divestment is highly prestigious and opens up new avenues for banks. So no one wants to miss out.
This has led to a situation where the investment banks bid at zero, making them pay out of their own pockets. Many issues had to be marketed with expenses being borne by the investment banks, as reported by Mint on 28 December.
In contrast, these banks charge 1-3% of the amount raised through the share sale of private sector firms.
“For the initial issues, investment banks have picked up the expenses,” said Kalpana Morparia, chief executive of JPMorgan India Pvt. Ltd, which marketed the follow-on public offering of state-owned power firm NTPC Ltd. “But this can’t continue. In the upcoming issues, they should at least be able to break even.”
Under the proposed system, the government will first identify the banker and then negotiate the commission based on deal specifications.
Pradhan said the new process would give more weightage to the experience of investment bankers in handling public issues, especially government ones.
“There is a recognition of this issue in government circles. I hope in the days ahead, they will start distributing the issues among investment banks,” said Tarun Kataria, managing director and head of global banking and markets, India, HSBC Holdings Plc.
“The smart thing will be to allocate the mandate and then negotiate the fees,” Kataria added.
The government is kicking off its disinvestment programme with follow-on public offers of a few listed public sector units, including NTPC, NMDC Ltd and Satluj Jal Vidyut Nigam Ltd.
In NTPC, the government is divesting a 5% stake to collect Rs11,000 crore. An 8.38% divestment in NMDC, at its current market price, could fetch around Rs14,000 crore.
This will be followed by initial public offerings of Bharat Sanchar Nigam Ltd and RITES Ltd, and a follow-on public offering for Steel Authority of India Ltd.