I-bankers hit back at Sebi on PSU floats

Say regulator’s criticism of near-zero fee for government issues unfounded

Investment bankers have dismissed the capital market regulator Sebi’s concerns over near-zero fee for managing public sector issues.

Bankers say the fee is a function of competition and, globally, too, government mandates are done at a lower cost compared with private sector issues.

In an event organised by merchant bankers on Friday, Securities and Exchange Board of India (Sebi) Chairman C B Bhave had said investment bankers need to introspect whether it is healthy competition to quote near-zero fees to bag government issues.

For example, reports suggest that six investment bankers have quoted a fee of Rs 12,500 to manage the Coal India issue that aims to mop up over Rs 13,000 crore next month.

However, bankers, who spoke on the condition of anonymity, said near-zero fee for government issues is a function of market dynamics.

“As an investment banker, I would love to charge higher fees for public sector issues. But I have to quote a low fee because of competition,” said managing director of a domestic investment bank, who has worked on many government issues.

Interestingly, investment bankers with an experience of working with governments across the world find nothing wrong in the zero-fee game, which, they say, is a “global practice”.

“For any investment banker, including us, the government is an important constituent. These issues are very large and, therefore, everybody wants to manage them,” said the managing director of a leading foreign investment bank. “If the rule of the game is less money, you make less money. But that is true globally, too. Revenue from government transactions is significantly lower than those from the private sector.”

Another banker who has been part of the lead managers in a few divestment issues said the fee is also a factor of the quantum of sales and marketing activities that need to be done to make the issue a success (story). “Quality public sector issues have ready takers and the bankers do not really need to go out and convince investors to put in large bids.”

“It is true that managing a divestment issue burns a hole in the investment banker's pocket. But the efforts involved in marketing a public sector issue is far less than that for a private entity,” he said.

Among the recent government issues, Engineers India Limited was subscribed 13.35 times, while SJVN was subscribed 6.51 times.