The government will now have to pay investment bankers for managing the initial public offerings (IPOs) of public sector units (PSUs), as none of them seems interested to perform gratis services.
Till now, the government paid a fee of Rs 1. However, no banker has quoted Rs 1 fees in the bid for the recently concluded investment pitches to manage the share sale of general insurers New India Assurance and General Insurance Corporation of India (GIC Re), or Indian Railway Catering and Tourism Corporation (IRCTC), among others, said sources.
This is a stark departure from earlier PSU issues, when bankers always quoted Rs 1 — the minimum fee to bid for the mandate. This was done keeping in mind the boost the investment banks would get in the league tables for handling the sale.
Bankers would get a significant leg-up as the issue sizes of PSUs would be large. However, the current line-up of PSU IPOs is of relatively small companies. The total size of these IPOs put together is around Rs 20,000 crore. But if you discount the top two issues, the average size of the other four issues is about Rs 2,000 crore, according to an investment banker.
“Earlier, the loss in revenue by managing PSU issues would be compensated by a boost in league table rankings. However, it is not possible to do so in these IPOs and, hence, there is no incentive for us to manage these. Also, we have agreed to pay for some additional expenses in terms of road shows, advertising, etc,” the banker said.
However, the fees paid by the government will not be on a par with private players. According to bankers, the fees they have quoted were around 30 to 70 basis points of the issue size. One basis point is a hundredth of a percentage point. In case of private sector companies, the average fees paid to bankers in the past year have been around two per cent of the issue size, the data showed.
The government has taken some special steps to ensure a smooth sailing for these IPOs, as they are crucial for achieving this year’s disinvestment target.
For instance, several bankers had raised concerns about the conflict of interest clause for handling the issues. Typically, bankers are not allowed to undertake fundraising issues of any company in a similar line of business while handling these IPOs. The government subsequently softened its stand by keeping private issuances like qualified institutional placements out of the ambit.
The government has also revised the bidding process for these IPOs. Starting with the GIC Re IPO, the government has introduced the electronic bidding mechanism. This change is in line with the current policy.
The government has set itself an ambitious divestment target this fiscal year. It plans to raise Rs 72,500 crore; of this, it expects to get about Rs 20,000 crore through the IPO route. Another Rs 11,000 crore is expected to come from sale of its stake in specified unit undertaking trust (Suuti).
Although the government has never achieved divestment targets, this fiscal year could be different, experts said. The secondary markets are currently in a good phase with benchmark indices trading at all-time highs. There is also a revival in global commodity prices, which would help a lot of PSUs, said analysts.
“It is a good time for divestment as market conditions are positive and there is enough liquidity. Although these PSUs have to compete with the private sector for investor interest, good quality paper will also be lapped up the investors,” said Salil Pitale, managing director for investment banking at Axis Capital.