IPOs squeeze broker margins

Book running lead managers cut brokerage fees, applicants to IPOs seek percentage of brokerage.

Despite the huge successses of mega Initial Public Offers (IPOs) of companies such as the Oil and Natural Gas Corporation, Tata Consultancy Services and National Thermal Power Corporation, brokers, a critical distribution channel in the IPO business, say they have had enough, as they are getting squeezed on both sides.

The book running lead managers have cut their brokerage fees and now some applicants to IPOs want them to part with a percentage of the brokerage.

Some brokers told Business Standard that in the recently concluded NTPC IPO, which received a huge response, certain non-institutional bidders (read companies), high net worth individuals and large domestic mutual funds demanded almost a 100 per cent "refund" of the brokerage fees that accrue to the broker on allotment of applications made through them.

One institutional broker, on condition of anonymity, said he had to face an irate finance director of a company who demanded to know what effort the broker was putting in to earn his fees. Almost at gun point, the director asked for a near 100 per cent "cash back".

Market sources said in an IPO, the book running lead managers between them typically get 0.40 per cent to 0.70 per cent (of the issue size) as brokerage. They then pass on 50-80 per cent of this to the brokers involved in the selling of the IPO.

Brokers though have a different view. They say that the job of a broker has increased manifold in these IPOs, in line with investor participation.

Though the number of applications they process is huge, the allotment is proportionately lesser. This means that though they process a large number of applications, they get paid only for the minuscule percentage that get finally allotted.

Confirms Ambareesh Baliga, vice president at Karvy Stock Broking: "The broking fees have come down drastically for IPOs, though the work load has only increased."

The brokers are also getting squeezed by the book running lead managers as they are passing on less brokerage fees to them, as they themsleves are being paid less. The book running lead managers' reasoning is that there is a huge demand for most IPOs now and, therefore, not much selling is required.

Besides, the book running lead managers claim that they are leveraging their own distribution channels to sell the IPOs. What is more, they themselves are getting paid a lot less to manage these IPOs.

Kamlesh Gandhi, executive director at Centrum Finance, who is also a director of the Association of Merchant Bankers of India (AMBI), said, "Merchant banking fees are dropping steeply, depending on the saleability of the issues."

Also, competition among merchant bankers is taking a toll, he added. Players said that fees have dropped to as low as 0.05 per cent, with many recent issuers paying a flat fee despite the huge size of the issue.