Bankers' fees drop as IPO sizes balloon

Average fee for IPOs this year 1.6%, lowest in seven years

While volumes on Deal Street have seen a sharp improvement over last year, it hasn't necessarily translated into huge windfall gains for investment banks. The reason: sharp reduction in fees charged by banks to manage Initial Public Offers (IPOs). This year, investment banks have charged 1.6 per cent of the amount raised through IPOs as fees. In comparison, investment bankers had charged two per cent last year and 3.1 per cent in 2015. The average fees this year is lowest in seven years.

In the first nine months of 2017, investment banks pocketed Rs 500 crore for helping companies raise Rs 30,853 crore through IPOs. Last year, banks had pocketed Rs 550 crore was raising jus Rs 26,493 crore.

In other words, investment banks have let go of margins for higher volumes. An analysis of fees paid for each of the 24 IPOs this year, shows fees have been less than 100 basis points for big-ticket IPOs.

ICICI Lombard, SBI Life Insurance, Avenue Supermarts and Hudco have each paid less than 100 bps.

"Currently, there is lot of competition for IPO mandates and typically the fees paid in big-ticket deals are always less compared to small and mid-sized issues. We needn't worry about the money earned as shortfall in the fee will be compensated by large volumes," said an investment banker. He added that in two-three IPOs this year, one or two banks were quoting steep discounts and others were asked to match-up those offers to get the mandate.

Another important factor behind low fees this fiscal has been the IPOs of state-owned entities. Traditionally, the fees paid for large public sector undertakings (PSU) offerings is miniscule as bankers consider them "trophy mandates" which help improve their league table standings.

For instance, bankers were paid less than 0.5 per cent fees in Housing and Urban Development Corporation (Hudco) and Cochin Shipyard IPOs. Sources say, even the fees paid are even less for General Insurance Corporation (GIC Re) and New India Assurance. In the past, bankers had handled some of the large PSU IPOs like Coal India for near-zero fees.

On the contrary, fees for handling small or mid-sized IPOs have been more than three per cent in most cases.

Despite decline in average fees, market participants say increase in volumes over the past two years has provided much-needed breather for the investment banks, who have been reeling under pressure since 2011 due to subdued activity in the Indian capital markets along with escalating input costs.

In fact, the stress was so huge that lot of banks had to downsize their head count. Some of the international banks have shut their Indian offices and continue to operate from Asia Pacific centres such as Singapore and Hong Kong. However, the situation now seems to be improving. Currently there are about 10-15 active investment banks against the long term average of seven-eight.