New float rule gives more elbow room to I-bankers

Ashish Rukhaiyar
Mumbai, June 9, 2010

But higher volumes may not mean substantial change in fee structure.

The government’s decision to raise the minimum threshold of public holding in listed companies is good news for the investment banking fraternity.

According to industry sources, the finance ministry diktat would provide investment bankers enough room to negotiate on the fee structure. A substantial change, however, from the current structure is not what bankers are betting on.
Last week, the government stated that all listed companies should have a minimum of 25 per cent public holding. Existing listed companies with a lower public holding will have to dilute at least five per cent annually to reach the 25 per cent mark. There are more than 170 listed companies with a public holding of less than 25 per cent. The dilution in all these would result in fresh paper totalling approximately Rs 1,60,000 crore flooding the market in the coming months.

Limited change
While this would obviously lead to a higher volume of business for investment bankers, a notable change in the fee structure is unlikely, as the margins are believed to be quite low. Most of the investment bankers spoke on condition of anonymity and said the competition was quite high and the net margins already “wafer-thin”.

“The investment banking fees would be under some amount of pressure,” says Abizer Diwanji, head (financial services), KPMG India. “The risk reward ratio would be low for bankers. The new norm would see a lot of PSU offerings too, wherein the fees have completely flattened. Many of the private sector entities would be sceptical and so might look at delisting also,” he says.

“On an average issue size of Rs 500 crore, the bankers would be getting around three per cent,” says the head of a domestic investment banking entity. “The net margins, however, would be around two per cent or even lower, as there are distribution and marketing expenses associated with the deal. Earlier, underwriting fees were paid separately but that is no longer the case.”

In a study note released in March, SMC Capitals had observed the average investment banking fees in private sector issuances was about 2.9 per cent of the issue size. In the case of DB Realty that raised Rs 1,500 crore, investment bankers were paid Rs 32 crore or 2.1 per cent of the issue size. While bankers got only 1.9 per cent in Birla Shloka Edutech, in Aqua Logistics they made a clean five per cent, according to SMC Capitals.

More effort, too
“The government decision would not change the rules of the game but there is a likelihood that difficult issuances would net a higher share for the bankers,” says the head of another domestic entity that is considered big in IPO distribution. “While the volume would be high, bankers will now have to put greater efforts to see the issue sail through. More paper means more efforts. The market is also not in the best of form. Even the government is having problem raising money,” he explains.

The government has set a target of Rs 40,000 crore to be raised through divestment in the current financial year. But, cracks are already visible with the mega public issue of Coal India deferred due to the prevailing uncertainties in secondary markets.

Interestingly, big business from the government sector does not result in high revenues. The investment banking fees, on average, have been a mere 0.05 per cent in PSU offerings. In the follow-on offer of NTPC, four investment bankers were paid a total of less than Rs 6 crore.

Investment bankers are, in a way, unanimous in saying that the flooding of issues would make the process quite competitive and, at the same time, difficult. Pricing, they say, would gain further importance and if the company doesn’t leave enough on the table, then there would not be enough takers.

Some bankers feel the new norms would give them more room to negotiate with the issuer company and, at times, be more selective. Also, not all companies would go for a follow-on offering. Promoters of many companies could also go for a private placement of shares.