Investment banks in India faced pressure on fees as competition intensified for state asset sales in a record year for equity offerings, said the head of JPMorgan Chase & Co’s local operations.
“We didn’t start the low-fee game. But we now have to pitch lower fees if we want to be on deals since everyone is doing it,” Kalpana Morparia said.
JPMorgan is among six banks that agreed to split a fee of less than one paisa (0.02 cent) for underwriting the latest state deal, a secondary sale of shares in Steel Authority of India Ltd, according to two people with knowledge of the matter. Banks must match the lowest fees to win work on state deals, according to government guidelines.
The Wall Street firm, ranked first globally in managing equity sales, slipped to eighth in India this year for domestic stock sales and rights offerings from sixth in 2009, according to data compiled by Bloomberg. Citigroup is the largest this year.
“We don’t look at our rankings on the basis of just domestic deals,” Morparia, 61, said. “We weigh ourselves on all the deals done for an Indian company, overseas or domestically.”
New York-based JPMorgan won assignments to work on two other state deals in the past three months: A stake sale in Power Grid Corporation of India and an initial public offering of Manganese Ore (India). It will earn near-zero fees for those transactions as well.
“A bank could lose anywhere between Rs 2 crore and Rs 4 crore ($895,000) on deals that don’t pay any fees,” said S Venkatraghavan, head of equity capital markets at IDFC Capital Ltd in Mumbai.
More From This Section
Government guidelines
Losses from share sales in government-owned companies won’t affect JPMorgan’s profit “significantly” because there’s also a “huge private sector pipeline” with higher commissions, said Morparia. “India is making good money for the JP franchise.”
The benchmark Sensex Index on the Bombay Stock Exchange has gained 17.6 per cent this year, making it the best performer among the world’s 10 largest stock markets. Indian companies raised Rs 75,300 crore in equity and rights offerings in 2010, 33 per cent more than in the same period in 2007, the record year for domestic equity issuance, Bloomberg data show.
At least 95 companies have lodged draft offer documents with the securities regulator seeking approval for initial share sales, according to filings. “In India, small deals usually pay more for the banks than being one of five or 10 banks on a large mandate,” Morparia said.
Don’t blame the system
The government’s selection process isn’t to blame for low investment-banking fees, Disinvestment Secretary Sumit Bose said in an interview on September 30. The government tweaked the bidding process this year to score a bank’s proposal 70 per cent on its technical presentation and 30 per cent on its fees.
“This system in no way asks for zero bids or near-zero bids, it just asks for competitive bids and that’s the way we would like to proceed,” Bose said.
Morparia said she agreed with that assessment. “The government’s bidding system is not to blame for near-zero fee bids. This is a function of intense competition,” she said.
India’s government plans to raise Rs 40,000 crore from state share sales in the year through to March 31. It has met five per cent of that target so far.
The government aims to sell shares in eight companies in the remaining six months of the financial year, starting with Coal India Ltd. Its IPO is expected to raise more than $3 billion, said people involved in the deal, making it India’s largest.
Twenty banks, including JPMorgan, bid to manage the share sale, according to disinvestment department notices.
“India is one of the most competitive markets in the region, and it’s not one of the most profitable,” Morparia said. “Yet banks want to expand here because the country is growing at a phenomenal pace.”