The government has pulled up four investment banks for taking up the mandate to manage Tata Steel’s follow-on public offer (FPO) at a time when they were already mandated to do the same work for Steel Authority of India Ltd (SAIL). Such a move is being interpreted by the government and the PSU as a conflict of interest.
These four banks, common for the two issues, are SBI Caps, HSBC, Deutsche Bank and Kotak Mahindra.
SAIL has already sent “showcause” notices to these banks, asking them to explain their position. “The letter has been sent after consultations with the steel and disinvestment ministries. It has been a collective decision, as the government feels strongly about the conflict of interests here,” said a senior government official, on condition of anonymity. C S Verma, chairman, SAIL, refused to comment. Sources in SAIL said their concern stemmed from the fact that the SAIL issue would come after Tata Steel’s and the “common bankers should see to that the issue does not suffer”.
‘Odd objection’
When asked, none of the four banks involved wanted to comment on the subject. Bankers, however, are surprised. “The time difference between the two issues has been quite huge. There was no exclusivity clause in the contract. So, you really don’t expect us to sit tight for all this while. The fee pool is shrinking, as competition is only going up,” said a banker.
A steel ministry official said the bankers had been given time till Tuesday to reply as to why they took up another FPO of a competing steel company when the first mandate was “alive”. Sources add that SBI Caps’ officials were also summoned to New Delhi on Thursday by the steel secretary. Similar meetings took place in the disinvestment department and in SAIL’s headquarters. SBI Caps is responsible for writing the prospectus for the SAIL issue.
SAIL’s FPO is slated to hit the market in the first week of February. As early as September 2010, SAIL had appointed six bankers — JPMorgan, Deutsche Bank, SBI Capital, Kotak Bank, HSBC, Enam Securities — to manage its Rs 8,000 crore-FPO.
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The government has decided to raise money in two tranches. The first tranche will see the government offloading five per cent of its equity in the company and SAIL will be issuing fresh shares to the tune of five per cent, raising a total of Rs 8,000 crore. The second tranche is expected to hit the market at a later date, thereby taking the total money raising exercise to Rs 16,000 crore.
Tata came later
Tata Steel announced its fund raising of Rs 7,000 crore in November 2010 and took the shareholders’ approval in December. The company was initially exploring the idea of a DVR (differential voting rights) issue but eventually settled for an FPO.
Tata Steel shortlisted seven banks — Deutsche Bank, Standard Chartered, Citi, Kotak Mahindra, HSBC, SBI Caps and RBS — for its FPO.
The fee quoted by DB to manage the SAIL FPO also caused quite a stir, as it offered to do the entire job for just 0.8 paise. Bankers blamed intense competition for charging such a fee; the bank wanted to ensure it got a share of the work, to be able to say it handled the job. After this, the government notified in all the disinvestment mandates that the minimum fee any bidder could quote to manage a transaction had to be at least a rupee.
Analysts feel the first mover will indeed have an edge. “Liquidity is not a problem in the market, but investors will prefer Tata Steel, because of the better earning visibility and higher capacity addition in the year. More, Tata Steel has substantial stakes in raw material resources abroad. Also, since Tata Steel is coming out with its FPO sooner, it surely will have a first mover advantage,” said an analyst.