Quote nearly 50 basis points as against near-zero fee for earlier PSU issues.
Around a fortnight ago, Securities and Exchange Board of India (Sebi) Chairman C B Bhave expressed concern over investment bankers quoting near-zero fee for bagging divestment mandates.
The impact is already visible. Investment bankers say sensible fees have been quoted for the follow-on public offers (FPO) of Shipping Corporation of India (SCI) and Hindustan Copper.
According to people familiar with the development, the selected investment bankers have quoted nearly 50 basis points, or 0.5 per cent, for these issues. While this is still low and the bankers will not be able to make a hefty profit, they will at least break even, they add.
“Both the issues will see the bankers make at least some money,” said a banker, on condition of anonymity. “The fee that has been quoted is 0.48 per cent,” he added. Incidentally, while this may appear negligible, it is much higher than in the earlier issues. For example, bankers quoted as low as 0.00000001 per cent in Power Grid Corporation’s issue.
The lead managers for the SCI issue are SBI Capital Markets, IDFC Capital and ICICI Securities. Hindustan Copper’s five bankers are ICICI Securities, Enam, Kotak Mahindra Capital, SBI Capital Markets and UBS Securities.
“We will be paid more than our costs,” said the head of an investment banking entity that has bagged the mandate. “While the quantum is still below one per cent, the bankers were sensible this time.”
Low bidding
According to a note by SMC Capitals in March, bankers were paid only Rs 10.25 crore for raising Rs 22,300 crore in four divestment offers. “The merchant banking fees of PSU public issues are as low as 0.05 per cent of the issue size,” it noted.
Reports further suggest that six banks together quoted a total fee of just Rs 12,500 last month to manage the IPO of Coal India, which will raise around Rs 15,000 crore.
While the trend of zero fee was being heavily debated within the banking community, the Sebi chairman questioned the rationale of bankers losing Rs 3-4 crore per mandate.
“(Investment bankers) need to introspect whether it is a healthy competition,” Bhave said on September 24 while addressing a gathering of investment bankers. He suggested a “code of conduct or ethics” to avoid such competition.
Checks, incentives
Another banker familiar with the process says it is “unfortunate” that the lead managers quote an “abysmally” low number to bag the mandate, but the government is too big an entity to be neglected and the competition is really tight.
“It is not that the government does not want to pay. Unfortunately, banks make bids in a manner the government can do nothing about it. To be associated with the government has a lot of advantages in terms of secondary market trades, research and getting new institutional clients. It doesn't, however, compensate entirely,” he said.
