Domestic investment bankers rake in hefty bonuses as issues swell

All-time high mop-up of Rs 1.2 trillion through IPOs, QIPs in 2017-18

Domestic investment bankers are set to sign off a blockbuster year for equity fund-raising by taking home hefty bonuses, ranging between 100 and 200 per cent of their annual pay.

The current financial year has seen a mop-up in excess of Rs 1.2 trillion, a historic high, by way of initial public offerings (IPOs) and qualified institutional placements (QIPs).

Bonuses are typically commensurate with deal activity in any given year. Investment banks, on average, pocket 2-3 per cent as fees for managing an IPO and 1.5-2 per cent for handling QIPs. Fees vary depending on the issue size and the number of bankers managing the deal. 

“Bonuses for most domestic investment bankers are likely to range between 100 and 150 per cent of their annual pay. The top performers could walk home with bonuses as high as 200 per cent,” said a domestic investment banker on condition of anonymity. 

Bonuses in the previous fiscal year averaged around 50 per cent, said bankers. The uptick in the secondary market, combined with significant domestic flows and the rush for exits by private equity players, has helped the cause of IPOs. The surge in equity capital raising, particularly QIPs, has been driven by the need to retire debt and build reserves for acquisition of stressed assets.

While banks have led most of the QIP activity, the entire financial services space, comprising insurance firms, asset management companies, and non-banking financial companies (NBFCs), has boosted IPO activity. More than four-fifths of the amount garnered through IPOs are share sales by existing investors, including promoters, private equity and venture capital funds.

“Domestic liquidity remains strong and investors are betting on the India growth story, which is why there has been a demand for both IPOs and QIPs,” said Dharmesh Mehta, managing director and chief executive officer, Axis Capital.

“A buoyant market and stable macro-economic environment have contributed to the frenzied fund-raising activity,” said V Jayasankar, head, equity capital markets, Kotak Investment Banking. The top three IPOs this year are by GIC (Rs 113.7 billion), New India Assurance (Rs 96 billion), and HDFC Standard Life Insurance (Rs 86.9 billion).

Top QIPs, on the other hand, include banks such as State Bank of India (Rs 150 billion), Kotak Mahindra Bank (Rs 58 billion), and Punjab National Bank (Rs 50 billion).

“Both insurers and mutual funds handle sizeable public money and listing on the bourses will pave the way for better transparency and corporate governance standards for these firms,” said Pranav Haldea, managing director, PRIME Database.

Domestic bankers have been cornering a larger share of the equity fund-raising pie even as foreign players have become selective, experts said. Until a few years ago, foreign investment banks were considered indispensable in handling large issues of over Rs 10 billion, owing to their better reach and marketing prowess. That is no longer the case. 

Indian companies taking the IPO route are now much more confident about the execution skills of domestic investment banks and their capability to attract both domestic and overseas funds. 

Domestic investment banks have ramped up operations significantly, even as several foreign investment banks, especially the European ones, have scaled down.

“Between 70 per cent and 80 per cent of an offering today is effectively a domestic book that includes mutual funds, insurers, high net worth individuals and retail investors. Domestic investment banks are best suited to cater to this set as they understand the macro and micro story better than overseas investment banks,” said Mehta.

Record money flowing into domestic mutual funds has found its way into IPOs, reducing the dependence on overseas anchor investors. 

Mutual funds, for instance, are flush with funds on the back of monthly equity inflows to the tune of Rs 50-60 billion from systematic investment plans (SIPs). 
 

This financial year, foreign portfolio investors have shopped for equities worth Rs 173 billion, while domestic institutions have bought shares worth over Rs 1 trillion from both primary and secondary markets.