Wall Street banks have had enough of heavy work for puny paychecks on Indian government share sales - at least when it comes to smaller or difficult deals.
That choosiness comes at a bad time for India, which may struggle to hit its goal of raising nearly $6 billion from share sales in state companies by the end of March with investor demand for new shares expected to remain modest.
Just three banks, all local, bid to run a roughly $300 million stake sale in National Aluminium Co Ltd , said bankers with direct knowledge of the matter.
Two years ago, by comparison, 10 banks - four of them global heavyweights - bid to manage a $275 million initial public offering by state manganese ore producer MOIL Ltd .
That was despite a payday of $3 split among three winning banks with no reimbursement for expenses. That is a standard setup for state deals in India, where investment banks can lose $1 million or more on costs but have played along for league table credit and the hope of future business.
Now, global banks, weakened after rounds of job cuts, are shying away from state deals that are too small or difficult to do purely for credit in industry rankings.
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"A couple of years ago, we would bid aggressively for all the government deals, hoping to win some of them. Today, we spend a lot of time in deciding the ones we would like to bid for the mandate," said the equity market head at a leading U.S. bank.
"The reason is simple - why take on additional costs when the business itself is bad?" said the executive, who like several other bankers declined to be identified for fear of losing future government business.
Banks lose money on even the biggest Indian state deals.
Coal India Ltd , which raised $3.5 billion two years ago in India's largest IPO, paid fees to its six banks that were not enough to cover a night's stay in a hotel during the investor roadshow to places like Singapore and Hong Kong.
By comparison, fees for private sector IPOs in India are between 2 percent and 4 percent of the money raised, while for secondary share deals they range from 1.5 to 3 percent, banking sources said. In China, state companies pay about 2.5 percent for IPOs in Hong Kong, and 1 to 1.5 percent for follow-on sales.
"It's tough to build a sustainable investment banking business or indeed a sustainable disinvestment process based on no fees while also bearing all the costs of the offering," said Tarun Kataria, CEO of India's Religare Capital Markets, who was previously HSBC's India head of global banking and markets.
Low fees, low effort?
Bankers have long grumbled in private about New Delhi's miserly fees. The downside for the government is that it may not get the best effort from banks, and deals sometimes fizzle.
"There's got to be some incentive to do these deals. If the banks are losing money on these deals, they won't put in their best effort," said a banker with an Indian investment bank.
State investors led by Life Insurance Corp of India (LIC) have ended up bailing out several big share sales that failed to generate sufficient market demand.
In a botched deal in March, LIC ended up with most of the shares in a $2.6 billion stock auction in Oil and Natural Gas Corp that led to finger-pointing over its handling, with the government coming in for a big part of the blame.
New Delhi can be a difficult client, sometimes ignoring advice from banks on pricing and timing. The floor price for the ONGC auction was set at a 2.3 percent premium to its trading price, giving little incentive to buy.
Many state deals are long in coming to market.
The lowest-ever winning bid was on a share sale by Steel Authority of India - one-hundredth of a rupee split among six banks including JPMorgan , Deutsche Bank and HSBC . That mandate was awarded in 2010 and the deal, worth over $1.5 billion then, is still pending.
"The government is not as flexible as the private companies. They call us to New Delhi at the drop of a hat for meetings and despite that some deals take years to get executed, if at all," said the equity market head at a big foreign bank in Mumbai.
More to come
India is in the process of appointing banks to manage share offerings in four firms - National Aluminium, MMTC Ltd , Oil India Ltd and NMDC Ltd .
Last month, Credit Suisse was the only foreign bank among six to pitch for a share sale in Neyveli Lignite to raise up to roughly $150 million. It is one of the three banks short-listed for the deal.
The deadline to run the sale of 9.33 percent of trading firm MMTC was extended last month after drawing a muted response, a government source said.
Global banks have shied away from MMTC, which is 99.33 percent state-owned and has a price-to-earnings ratio of over 600 times, making it tough to price.
Major banks still covet the bigger state deals.
Last week, India short-listed five banks including Goldman Sachs , Citigroup and Bank of America-Merrill Lynch to sell 10 percent of iron ore miner NMDC for roughly $1.5 billion.
The winners were chosen from 16 bidders including Credit Suisse, Barclays and Deutsche Bank.
The short list for Oil India's $550 million share sale is expected next week, and it may see more interest from banks due to its size and hopes of getting follow-up business, including M&A advisory, from the cash-rich company, banking sources said.