Pay for I-banking at pre-crisis level

Ashish Rukhaiyar
Mumbai, 17 May 2011

Indian bankers cash in on difficult market conditions for domestic offerings, still cheapest among leading economies.

It is often said that there is a price for everything. Investment bankers, it seems, know it better than anyone else. With domestic equity markets in a state of flux and most public issuances getting a tepid response, bankers will still take a company public but at a higher cost.

Data shows the share of investment banking fees in domestic equity offerings is at its highest level since 2007. If one considers only the Initial Public Offers (IPOs), the fees have never been higher in the past six years.

According to data with Bloomberg, the current year has seen a total of Rs 19,700 crore raised through 25 domestic equity offerings. The fee component has been pegged at 1.49 per cent, the highest since 2007, when bankers cornered 1.73 per cent of the money raised as fees. In 2010, the fee share was less than one per cent. In 2008 and 2009, it was 1.16 per cent.

According to investment bankers, the fee is a direct factor of the market scenario and tends to go up when the conditions are quite volatile, with no definite trend emerging. Also, the recent past has shown that investors are still jittery about investing in the primary market.

“It is quite evident that it difficult to sell an issue in the current market,” says a head of a foreign investment banking firm. “Completing the deal in such a scenario is a herculean task and calls for much more effort in terms of roadshows, broker and sub-broker network, etc. So, the costs shoot up,” he said, while wishing not to be named due to the sensitive subject.

The share of investment banking fees is still higher in IPOs. In 2011, as many as 15 new companies have gone public, raising Rs 3,200 crore, with the fee component at 2.47 per cent. Not since 2005 have the fees been so high in the IPO space. The past three years saw the IPO fee share only a tad higher than the one per cent mark.

Investment bankers, on conditions of anonymity, say the IPO space had seen a lot of smaller and little-known companies getting listed in the recent past. The bankers' job was made all the more difficult with institutions staying away, which shook the confidence of retail investors. This forced bankers and the broker fraternity to bring on board a large number of high net worth individuals (HNIs).

While the fees have increased in the current calendar year, the services of Indian bankers are still among the cheapest when compared to some of the other leading economies of the world. According to Bloomberg, US bankers charged 3.7 per cent as fees in 2011, while their counterparts in China and Japan cornered 4.63 per cent and 4.21 per cent, respectively. Bankers in the Asia (ex-Japan) region charged 3.65 per cent fees in 2011.

Bankers also add the last year saw a dip in the fee even while a significant amount of money was raised, as there were some mega-sized offerings from the government stable. It is a fact that the banker fee is next to nothing while managing these issues.