Mumbai: India’s best quarter for stock sales in at least six years was accompanied by a slump in fees as investment banks competed to take state-owned firms public in deals that netted them almost no revenue.
Companies led by NMDC Ltd raised Rs44,100 crore through 31 March, the most for a single quarter since Bloomberg began compiling data in 2004. While the value of sales doubled from the previous three months, fees slumped by half to Rs200 crore, according to Bloomberg data.
More than half of sales were by state-owned firms that paid near-zero fees and crowded out private firms, putting pressure on banking revenues. JPMorgan Chase and Co. and ICICI Securities Ltd are among underwriters predicting a rebound in charges this year as more private companies tap stock markets for capital and the government overhauls the way it pays banks.
“The private sector IPO (initial public offering) pipeline is very strong and those deals will result in lucrative fees for the banks,” said Jagannadham Thunuguntla, head of equity at SMC Capitals Ltd, the investment banking arm of New Delhi-based SMC Group.
At least 55 private companies are awaiting approval from the securities regulator to sell shares, according to the Securities and Exchange Board of India’s website.
State-owned companies that sold shares last quarter paid an average 0.05% of what they raised as fees, according to an SMC Capitals study released on 30 March. That compared with 2.88% for private enterprises.
State-run United Bank of India paid 0.56% fees for its Rs325 crore IPO in February, managed by Edelweiss Capital Ltd, Enam Securities Pvt. Ltd and SBI Capital Markets Ltd, according to data compiled by Bloomberg.
A similar-sized IPO by Jubilant FoodWorks Ltd netted 2.72% fees for bookrunner Kotak Mahindra Capital Co. Ltd. (The promoters of HT Media Ltd, which publishes Mint, and promoters of Jubilant FoodWorks Ltd are closely related.)
A price war between investment banks seeking league-table credit isn’t necessarily in the government’s interest, the official in charge of selling state assets said last month. “We had some cases where the banks bid at zero fees and the department was more than unhappy with that kind of approach,” Sumit Bose, secretary, department for disinvestment, said in a 6 March interview in New Delhi. “We are looking at tweaking the rules to ensure that we continue to make a good selection without putting too much emphasis on fees.”
As part of the new regulations, weight will be given to technical, including their experience, what sort of experience they have had internationally, nationally, along with how competitive fees are, Bose said.
The government will remain a dominant force in the equity capital market. It plans to raise $8.9 billion (Rs39,605 crore) selling shares in state-owned companies in the fiscal 2011—more than half the total value of last year’s offerings.
Investment banks are willing to sacrifice fees for the cachet of having been picked to manage large sales, said Indraneil Borkakoty, head of equity capital markets at Kotak Investment Banking, a unit of Kotak Mahindra. Kotak ranked second after Citigroup Inc. in arranging stock sales in the first quarter, after helping state firms NMDC and Rural Electrification Corp. Ltd issue shares, according to Bloomberg data.