Bankers' fee strategy under Sebi scanner

Ashish Rukhaiyar
Mumbai, 22 June 2011

At a time when fee income from managing primary market issuances is down to a trickle, it is not surprising that investment bankers are coming up with innovative marketing and pitching strategies. One such strategy, however, has attracted the attention of the capital markets regulator.

Persons privy to the strategy, on condition of anonymity, say domestic and foreign bankers have been convincing promoters to raise more than the intended amount of money by charging ‘slab-based fee’, which has not gone down well with the Securities and Exchange Board of India (Sebi). It is, however, not clear if the regulator has formally initiated any enquiry in this issue.

“Bankers know that a particular company needs Rs 200 crore but will tempt the promoters by saying they can help raise Rs 250 crore,” a senior official of a mid-sized investment banking firm said. “But the catch is, for the extra Rs 50 crore, the fee will be higher than what is being charged for the first tranche of Rs 200 crore,” he added. In simple words, if the banker is charging two per cent for helping raise Rs 200 crore, the ‘top-up’ of Rs 50 crore will cost the company three per cent (of Rs 50 crore).

The fee quotient will further go up if the promoters agree for Rs 300 crore. While there is no compulsion on the part of the promoters to agree, many of them fall prey to the offer. It is no secret that capital raising has been a challenge in the recent past and an extra amount of money is more often than not welcome in such market conditions.

“Most of the leading banking entities have their loyal set of investors who would chip in even if the pricing can be termed ‘aggressive’,” said a person involved in the initial public offer (IPO) distribution process. “This gives the banker the much-needed flexibility in pricing the issue. He knows there are takers,” he added.
This, according to industry sources, has made Sebi uncomfortable. The regulator, incidentally, had pulled up investment bankers in the past for ‘maximising’ profits for promoters and ignoring investor interest. Industry sources say that while such practices were prevalent even during the bull period, it has gained significance now given the paucity of companies looking to launch a public issue.

“If you look at maximising the price for promoters then obviously you are not looking at the interest of the investors,” former Sebi Chairman C B Bhave had said at an event organised last year by the Association of Merchant Bankers of India.

In a similar context, Sebi Executive Director Usha Narayanan, who handles the corporate finance portfolio, had questioned the role of the investment bankers. “What the investment banker is there for? He needs to advise promoters to leave something on the table. Some thoughts need to come out from within (the industry). This is more like self-regulation,” she had said at the same event.