Fees generated by investment banks for handling initial public offerings (IPOs) of equity have seen a sharp jump this year, after a drought in the past two years.
The IPO fee pool has climbed to Rs 350 crore so far in 2015, aided by recent large-ticket transactions such as of InterGlobe Aviation and Coffee Day Enterprises. Investment banking fees through IPOs were only Rs 50 crore for each of the previous two calendar years.
The spike this year has been on the back of revival in the primary market. Companies have raised nearly Rs 11,000 crore by way of IPOs this year, the highest since 2010.
“We have also seen some large-sized transactions, which have helped improve the fee pool,” said Girish Nadkarni, managing director, Motilal Oswal Investment Advisors.
The amount raised through IPOs in 2010 was, however, over three times what has been raised this year. Yet, IPO fees this year are more than half of 2010.
V Jayasankar, head of equity capital markets, Kotak Investment Banking, says: “This financial year, the IPO fee pool will be similar to 2010-11, a good year.”
Kotak Mahindra, Edelweiss and Motilal Oswal have all reported a significant improvement in their investment banking fees this financial year. Most financial services entities, which have been scaling back the personnel in their investment banking divisions, are again ramping up their teams, hoping the deal momentum would continue.
Both Nadkarni and Jayasankar feel the strong IPO trend of this year would continue when going into next year.
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G S Ganesh, founder of Inga Capital, said the overall fee pool had increased but fees as a percentage of the deal size hadn’t improved substantially. “Big issues don’t pay you that well. The fees on a transaction get distributed among all the banks.”
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Both the InterGlobe and Coffee Day IPOs were managed by six investment banks. An analysis of fees paid in IPOs this year shows these have been high for small-size transactions. Shree Pushkar Chemicals, 2015’s smallest IPO, paid 5.4 per cent of its issue proceeds to bankers. Pennar Engineered Building Systems paid 4.9 per cent of the Rs 155 crore it raised.
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“The percentage fees in mid-sized IPOs are good. However, the amount of effort required is humongous. Promoters of mid-sized companies need a lot of hand-holding. Also, selling the IPO isn’t easy,” said Ganesh.