'Fee structure makes PSU divestment business unviable'

Q&A: Tarun Kataria,MD and head, Global Banking & Markets, HSBC India

The disinvestment public sector companies may turn out to be be a big pie, but the fee and expense structure makes it unviable for investment bankers, says Tarun Kataria, managing director and head of global banking & markets, HSBC India. In an interview with Ashish Rukhaiyar, he says the bank’s equity capital markets (ECM) pipeline is strong and the merger and acquisition volume in India this year will be exponentially higher than last year. Excerpts:

How is the capital market pipeline of HSBC? You were not part of any recent initial public offers (IPOs) to hit the market
Our ECM pipeline is the strongest ever. We have a number of IPOs and qualified institutional placements that are set to hit the market in the coming months. For HSBC, it is not about the number of deals but the quality of the issuer and whether he is a client of the firm. In the last three months, we have turned down many opportunities we believed were not appropriate for us as a franchise. In addition, it is about distribution and after-market performance. Our life insurance IPO pipeline is also robust, but closure is a function of what the industry is allowed to do in the context of equity fund-raising, given ownership restrictions.

What was the reason behind HSBC staying away from divestment issues?
As a firm, we made a decision to stay away from these offerings because the fee and expense structure made them non-viable as an ongoing business. Book-runners were being asked to bear all expenses of the issue, which we were not comfortable with. And frankly, this is sub-optimal for the issuer also. Our view has been validated by the distribution performance of the underwriters in the last couple of IPOs. We will pitch for transactions, but based on a fee and expense structure that at least allows us to break even and demonstrate our powerful global institutional and India retail distribution.

But isn’t it a fact that margins in government issues are quite less globally as well?
No doubt, there is a prestige associated with government issues. But, doing these transactions as currently structured is sub-optimal for all, including the issuer, because the transaction does not get the attention it warrants. I don’t agree that global government issues are “no fee, all expenses borne” deals. This is, unfortunately, an Indian phenomenon.

The Securities and Exchange Board of India has made it mandatory for institutions to pay 100 per cent upfront margin. How do you see this affecting subscription numbers?
This is a good development for the long-term maturity of Indian equity markets. It avoids the froth that we often see in markets. This also helps separate the ‘real investor’ (who puts 100 per cent down) from the ‘lets go with the momentum’ investor. As a result, one will not see the massive over-subscriptions witnessed over the past few years.

Deal-makers have been talking about higher merger and acquisition (M&A) volumes this year. But, global factors are not in the best of shapes.
Deal volume will be materially higher this year than last year. Our M&A volume this year will be five to 10 times higher on a year-on-year basis. That partially reflects the improved sentiment. That said, some have suggested that global turmoil will remain a damper. Quite the contrary, I believe. India Inc should and will take advantage of global uncertainty. There are a number of reasons for this. Valuations in the G3 world are lower than in India. So, chances are that deals will be immediately accretive. The rupee continues to strengthen (the past few days notwithstanding), while G3 currencies are weakening. Further, financing is abundantly available to Indian borrowers, whether through domestic loan and bond markets, external commercial borrowings or equity markets. And perhaps, above all, we Indians make good business managers.

How do you see these global factors affecting the secondary markets?
India is globally integrated and hence will be affected. The question is to what degree and for how long. What’s happening in Europe is serious. Defaults, or debt restructurings, are a distinct possibility. What does that mean for the European banking system? You have to weigh the ‘Lehman effect’ against the PR associated with another ‘private sector bailout’. It’s complicated. So, secondary markets will be impacted. The good news, however, is that the India story remains good fundamentally and FIIs (foreign institutional investors) can see that. I expect flows in the near term to be negatively impacted, but this should reverse in the weeks ahead.