Banks see loss in quicker IPOs

Lenders, issuers expect an end to interest rate benefit from escrow accounts.

Securities and Exchange Board of India (Sebi) Chairman C B Bhave's proposal to cut down time between the opening of a public issue and its listing from three weeks to about a week is giving jitters to companies planning mega issues and their bankers.

Sources said the move could disappoint banks, which open escrow accounts to keep the initial public offer (IPO) application money till allotment of shares.

The proposal to slash the IPO time limit could lead to lower interest income for banks from such accounts. Companies, which have also benefited from a longer IPO process, are worried over the prospect of a quicker IPO regime.

Over the years, banks have coveted to provide the escrow account service to mega offers from top corporate houses.

The time-consuming IPO allotment system benefited escrow banks, which often deployed huge money collected through the IPO subscription into the call money market for a handsome 7-8 per cent return for over two weeks, admitted a banker.

According to the Indian Companies Act, escrow banks are restricted from passing on the interest earned from the IPO money to companies.

However, investment bankers are of the view that it has become a normal practice for banks to deduct IPO expenses from the interest rate income.

They then pass on the remaining money to companies. In case of escrow banks acting as investment bankers to the issue, which is mostly a norm than an exception, banks offer issuers a discount on some of their IPO-related services.

The additional interest income from the IPO money has also incentivised corporate houses to lower the pricing of IPOs. However, this has resulted in several illegal practices, with bankers on many occasions deliberately delaying the return of money to subscribers who had not received allotment.

Local banks often cater to retail clients, who have to pay 100 per cent of the subscription money upfront to subscribe to shares. Foreign banks, on the other hand, can sell shares to qualified buyers or institutions, which only pay 10 per cent of the application money.

This arrangement ensured that local banks deposited more money in escrow accounts and generated high income.

It also helped brokers or distributors to earn more commission as they collected more subscription from retail investors for high-profile issues.

If sources are to be believed, escrow banks for the Reliance Power IPO, the country's biggest public issue, earned interest income anywhere between $6 million and $14 million within two weeks.

The IPO had managed to collect a record $180 billion (Rs 710,000 crore) from over 45 lakh applications, which were parked in escrow accounts of Standard Chartered Bank, ABN Amro, HSBC, ICICI Bank, Kotak Mahindra Bank, Axis Bank and HDFC Bank for about two weeks.

According to a report in the Hong Kong-based International Finance Review, "Eight book-runners, two co-book-runners and seven escrow banks did not dare to broach the topic of IPO fee with Anil Ambani, the Reliance Power chairman."

The report quotes a source saying that a request from the Anil Ambani company was made to all the banks that got the subscription money. "They are all being requested to pay back now," said the source, according to the report.