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 companies public in deals that netted them almost no revenue.
Companies led by NMDC Ltd raised Rs 44,100 crore ($9.8 billion) through March 31, 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 Rs 200 crore, according to Bloomberg data.
More than half of sales were by state-owned companies that paid near-zero fees and crowded out private firms, putting pressure on banking revenues. JPMorgan Chase & 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 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 (Sebi) Web site.
Indian state-owned companies that sold shares last quarter paid an average 0.05 per cent of what they raised as fees, according to a study by SMC Capitals released March 30. That compared with 2.88 per cent for private enterprises.
Wrong approach
State-run United Bank of India, a lender in the country’s northern and eastern parts, paid 0.56 per cent fees for its Rs 325 crore initial public offering in February, managed by Edelweiss Capital Ltd, Enam Securities Pvt and SBI Capital Markets Ltd, according to data compiled by Bloomberg.
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A similar-sized IPO by Jubilant Foodworks Ltd, which is controlled by brothers Shyam and Hari Bhartia and runs the Domino’s Pizza chain in India, netted 2.72 per cent fees for the sole bookrunner Kotak Mahindra Capital Co.
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 of the department for disinvestment, said in a March 6 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, he said.
Dominant force
As part of the new regulations, “the 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 India’s equity capital market. It plans to raise $8.9 billion selling shares in state-owned companies in the fiscal year through March 2011 — more than half the total value of last year’s offerings in India.
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.
“The state transactions are global in terms of scale and size. There’s a huge visibility factor,” Mumbai-based Borkakoty said in an interview. “Doing these deals helps us get league table credit and build relationships with investors across geographies” that the bank can tap into for future deals.
Raft of sales
Kotak ranked second after Citigroup Inc in arranging stock sales in the first quarter, after helping state companies NMDC, India’s biggest iron-ore producer, and Rural Electrification Corp issue shares, according to Bloomberg data.
Vedika Bhandarkar, head of India investment banking at JPMorgan in Mumbai, said several private companies that had planned to sell stock in the first quarter delayed offerings on concerns state firms would soak up investors’ money. As those companies revive offerings, fees will improve, she said.
Since March 22, nine private companies — including Avantha Power & Infrastructure Ltd, Electrosteel Integrated Ltd and SKS Microfinance Ltd filed documents with the regulator for IPOs.
Fees for IPOs of private firms average 2 per cent to 3 per cent in India, about 0.5 percentage point more than secondary offerings, Bhandarkar said. JPMorgan ranked eighth in local equity sales in the quarter, advising on a share sale by National Thermal Power Corp.