HAL IPO: Foreign investment banks drop out over zero fees, inordinate delay

The HAL IPO, which opens later this week, was initially slated for 2014-15

Foreign investment banks, including Goldman Sachs, have opted out of the mandate to handle the share sale of the country's largest defence public sector undertaking (PSU) Hindustan Aeronautics (HAL). Inordinate delay and potential losses due to the zero-fee mandate are the reasons for behind foreign banks losing interest in the initial public offering (IPO), sources say.
 
The IPO, which opens later this week, was initially slated for 2014-15. In 2013, the department of disinvestment, now rechristened department of investment and public asset management (Dipam), had awarded HAL IPO mandate to SBICaps, Goldman Sachs, Barclays and Axis Capital. However, due to regulatory issues, the IPO was put on the backburner.
 
The plan was revived six months ago, with the company filing its offer document with the Securities and Exchange Board of India (Sebi) in September. Despite a delay of nearly four years, Dipam, instead of awarding the IPO mandate afresh to investment bankers, decided to go ahead with a set of appointed bankers. However, the foreign banks no longer want to be a part of the share sale.
 
While Barclays had wound up its India investment banking business, Goldman Sachs cited internal restrictions in continuing with the mandate, sources said. An email sent to Goldman Sachs went unanswered.
 
Investment banking sources say the main reason behind the banks opting out could be the desire to avoid losses.
 
"In 2013, all the four banks had quoted zero fees to win the mandate, in line with the persisting trend. Back then, investment banks used to quote ultra-low fees for PSU share sales. However, times have changed, and banks have become more cost-conscious. The Centre wanted banks to continue on earlier terms. Perhaps, this is the reason some banks decided to opt out," said a source.
 
According to industry players, both SBICaps and Axis Capital will have to spend around Rs 150 million on the HAL offering.
 

"Both the banks will incur losses, as the government is not paying any fees. SBI Caps and Axis Bank had to continue with the mandate, given their stronger ties with the disinvestment department," said another source.
 
Bankers' opting out of share sales midway are a common phenomenon.  The last time such an incident occurred was in 2016, when Kotak Mahindra Capital and ICICI Securities had walked out of e-commerce company Infibeam's IPO due to issues over valuation.
 
End of zero-fee mandates
 
Investment bankers said the trend of quoting near-zero fees to win mandates is no longer prevalent. Some of the recent PSU mandates, including Bharat Dynamics and Mishra Dhatu Nigam, have been all fee-paying, with the Centre offering to pay over 3 per cent of the issue size as investment banking charges.
 
"To bag PSU mandates, investment banks are quoting fees similar to what they charge for private sector share sales. Banks do not want to burn cash just to climb a few spots on the league table. Unless the share sales are large, running into a few billions, banks are unlikely to bid aggressively," said an investment banker.
 
According to Bloomberg data, investment banks charged an average fee of 2.93 per cent to handle IPOs worth a cumulative Rs 400 million that have hit the market this year. In 2018, the average fee was 1.1 per cent as IPO mobilisation hit a record high of Rs 733 billion. In 2017, the average fee stood at 2.1 per cent on a volume of Rs 265 billion.