I-banks back to aggressive ways in PSU share sales
New Delhi   11-Jul-2013

Two foreign banks bid Re 1 for NHPC mandate; IndianOil to see an encore

As mergers and share sales dry up, investment banks are leaving no stone unturned to stamp their presence in the Deal Street. A couple of them have agreed to manage the share sale of state-owned NHPC Ltd for Re 1. The move by foreign banks Credit Suisse and HSBC to win the mandate is expected to spark a fresh round of fee undercutting by investment banks for the coming share sales.

The government is looking at selling a 10 per cent stake in the hydro-power producer, which could fetch Rs 2,000 crore to the exchequer. As many as 10 bankers were in the fray to handle the NHPC offer for sale (OFS). Sources say investment bankers are likely to bid aggressively again on Thursday to secure the share sale of IndianOil.

Near-zero commission means investment banks have to incur cost from their own pockets, which may run into a few crores. The practice of near-zero bids to make it to the top of the league tables was prevalent in 2010, when equity fund-raising activity was at its peak.

However, bankers had stopped bidding aggressively in the past few years, barring a few big-ticket mandates, due to falling revenues from the investment banking business, coupled with severe restrictions on investment bankers seeking to participate in public sector undertaking (PSU) divestment.

Typically, investment banking commissions are about three per cent for private issues, while they were in the range of one to two per cent of the offer size of some recent PSU offerings. Senior officials with domestic investment banks say they are forgoing mandates which have no fees and it’s typically the foreign banks this time around which are bidding aggressively.

“Foreign banks are able to recover a large portion of their cost by providing services like funding and participatory notes for overseas investors participating in share sales. However, most domestic banks are at the losing end,” says an official with a domestic investment bank, shortlisted for IndianOil’s stake sale. The government is likely to sell a 10 per cent stake — valued at over Rs 5,000 crore at the current market price — in IndianOil.

The Department of Disinvestment (DoD) has allotted 15-minute slots to 17 investment bankers-- including league table toppers Citibank, Morgan Stanley and Goldman Sachs--that qualified in technical bids for the IndianOil public issue.

The financial bids made by the bankers will be opened on Thursday itself after the presentations are over. The banks that quotes the lowest fees during financial bidding are selected as the lead banker by the DoD.

The government has put in place strict guidelines for investment bankers participating in offers of PSUs that restrict them from advising private companies on public issues operating in the “same line of business”.

A slew of PSU share sales are likely this year as the government looks to achieve the divestment target to bridge the fiscal deficit and also to meet the Securities and Exchange Board of India's minimum public shareholding requirement.

In the private space, where companies have to meet besides the share sales done to achieve the 25 per cent public float norms, there have been only a handful of deals.

Investment bankers say the situation is unlikely to improve in a hurry, given the uncertain market conditions and unfavourable valuations.