Centre softens stance on i-banks for PSU mandate

Allows private placements of equity in rival firms; limits conflict clause to specific sub-sectors

To ensure success of its 2017-18 disinvestment target, the government is taking an easier approach towards investment banks participating in public sector undertaking (PSU) share sales.

The department of public asset management (Dipam), the government body in charge of divestment, has allowed investment banks with PSU mandates to take up certain types of capital market offerings by rival companies in the private sector.

The move comes after some lenders, including Deutsche Bank, raised concerns over the ‘conflict of interest’ clause applicable for the share sale mandate in seven PSUs, including Indian Oil and NTPC. Recently, the government floated a Request for Proposal, inviting i-bankers to manage share sales in these seven entities, in the power, finance, energy and metal segments.

Sectoral players say the bankers were keen on applying for the mandate but wanted clarity. Allaying their concerns, the government took a more lenient approach. It allowed i-banks to work on private placements, such as qualified institutional placement (QIP) or preferential allotment, of rival companies. Dipam, however, clarified that banks will not be allowed to take up Offers for Sale, initial public offerings and follow-on public offerings of private companies in the same sector.

 The Centre aims to divest stake worth at least Rs 25,000 crore in the seven PSUs during this financial year, say sources.

Further, Dipam has confined the conflict clause to only the sub-sectors where the PSUs operate. For instance, although Rural Electrification Corporation and Power Finance Corporation are part of the financial services sector, they are focused on infrastructure lending. Rather than restricting banks from taking up mandates from the entire financial services space, Dipam has kept out all other sub-sectors, including commercial banks, beside infra lenders. Similarly, i-banks have been allowed to take up mandates from companies operating in the renewable power sector, even if they bag the mandate for NTPC and NHPC.

“Private placements such as QIPs are in vogue right now, with the markets doing well. Many companies, especially banks, are looking to raise fresh capital before the current market rally ends. This has forced investment banks, especially the foreign ones, to request the government for relaxation. These banks are crucial for the success of the PSU stake sales, given their large size. Hence, the government considered the proposal,” said an investment banker.

This is not the first time the investment banks have raised doubts over the conflict of interest condition. Last year, while bidding for the Specified Unit Undertaking Trust of India (Suuti) mandate, they'd raised similar concerns. According to the initial proposal of the government, foreign bankers with the Suuti mandate were not allowed to undertake fund raising issues of any company abroad in a similar line of business. Suuti owns stake in 50 different companies, from diverse sectors. Hence, the bankers felt the conditions were very restrictive.

The government had subsequently relaxed the norms by confining the applicability of conflict to only three companies – ITC, Larsen & Toubro and Axis Bank – where the bulk of Suuti's stake was concentrated. Further, it allowed the banks to get into transactions in rival companies, provided they notified Suuti as and when they entered into any conflict of interest situation. In such a case, they'd not be allowed to manage the Suuti issue for that particular phase.

The Centre has set itself an ambitious divestment target of Rs 72,500 crore for the financial year. Of this, it expects to garner Rs 46,500 crore though minority stake sales. And, Rs 11,000 crore from strategic stake sales, which involves selling of the stake the government owns through Suuti. It expects another Rs 11,000 crore through listing of state-owned insurance companies.

Lenient terms

• Centre invites ibanks to handle share sale in seven PSUs

• Ibanks raise concerns about conflict of interest 

• Seek clarity from the government before bidding for the mandate

• Govt softens stance on the conflict of interest clause

• Govt allows ibanks to take up QIPs, private placement of rival companies

• Allows ibanks to take up share sale in private banks even if they bag PFC, REC mandates 

• Similarly, says share sale in renewable energy space not in conflict with NHPC, NTPC