Lobby hard to be collection agents for large issues to get hands on float money.
The success of Coal India’s (CIL’s) public issue has sparked a battle among top foreign and domestic banks. Royal Bank of Scotland, HSBC, ICICI, Kotak, HDFC, Standard Chartered, Axis Bank, Punjab National Bank, IDBI, SBI, Union Bank, among others, which acted as escrow collection agents for the issue, pocketed at least Rs 100 crore in just 10 days by lending the float money in the overnight call money market.
So, bankers are trying hard to become escrow collection agents of companies planning large issues. With primary market issuances by Indian companies likely to cross Rs 60,000 crore around March 2011, bankers believe the frenzy generated by CIL will continue. While investors scramble for a pie of other public sector companies, resulting in huge oversubscriptions, bankers are sensing windfall gains.
“Bankers are lobbying hard, mainly with the government, as companies like Hindustan Copper, Indian Oil Corporation and ONGC have lined up mega issues, likely to result in record collections,” said a banker.
The Rs 15,000-crore CIL issue saw a total collection of Rs 2.25 lakh crore, of which Rs 1.82 lakh crore came from qualified institutional buyers (QIB). Estimates by lead managers suggest 45 per cent of the Rs 1.82-lakh-crore investment was through offshore derivatives instruments, or participatory notes (PNs), which remained in the escrow account of banks for at least 10 days. The subscription for the QIB category closed on October 20 and the refund took place on the first two days of November.
By conservative calculations, banks lent Rs 1 lakh crore of the IPO money in the overnight call money market when rates were around six per cent annually. The per-day interest on this amount was Rs 14-15 crore, which translates into a gain of over 100 crore in eight to 10 days.
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PN leverage
Investment banking sources say the deal between foreign banks which are escrow agents for mega IPOs and PN issuers is struck in advance.
“Banks want higher float money to lend big. This is promised to them by the PN-issuing institutions and various agreements are signed so that the interest income from float money is divided,” said the head of a top investment bank.
PNs allow investors colossal leverage, as these are issued abroad and there are no specific restriction on investors using PNs. Domestic institutions can make only a single application, while PN holders are able to subscribe multiple times.
More, with truckloads of dollars available and borrowing costs close to zero in the US, banks finance investors to subscribe through PNs. In the CIL issue, two of the largest US institutions, Bank of America Merrill Lynch and Citi Bank, put in bids worth Rs 22,000 crore.
The income from the IPO subscription money is so huge that eight book-runners, two co-book-runners and seven escrow banks did not broach the topic of the IPO fee with Anil Ambani, the Reliance Power chairman, on his company’s over Rs 11,500-crore issue in 2008. In fact, a request from Ambani was made to all the banks to pay from the income earned.
To curb this problem of PNs and leverage in IPOs, which deprived Indian investors of higher allotment, the Securities and Exchange Board of India had cut the time line between closing of an issue and listing from three weeks to 12 days and also introduced the Application Supported by Blocked Amount method.