Lust for league table makes merchant banks crawl for PSU issues

Investment bankers have always been considered to be a tribe of street smart, suave, and sophisticated individuals, who are at their ferocious and calculative best when it comes to money matters.

They sniff a money making opportunity from a mile, weigh every move and word, and then cut deals at speed of knots if the math falls in place.

So one is left baffled and bemused when you see the same investment bankers bidding at ridiculously low rates to get their tiny share in some of the biggest initial public and follow-on public offers of state-owned companies.

When you see some of the finest brains of the country quote 0.00000000001% to get the mandate for Steel Authority of India Ltd’s Rs8,000 crore follow-on issue, you are left wondering if indeed this is anyway remotely connected to business acumen.

The earnings, and it is embarrassing to term it an ‘earning’, for each of the six bankers—Deutsche Bank, JP Morgan, SBI Capital Markets Ltd, Kotak Mahindra Capital Market Services Ltd, Enam Securities and HSBC Securities—translate into one sixth of 0.8 paisa.

How princely a sum is this for merchant bankers, who come from the finest of management institutes in the country, get astronomical pay cheques and treat Phuket as second home.
While the SAIL issue has certainly set a record low, it is not the first time that merchant bankers have quoted such a low fee.
Before SAIL, the merchant bankers had set this unenviable record in NMDC Ltd’s follow-on offer with a quote of 0.000000001% for the Rs10,000 crore issue.

Similarly, in the case of Manganese Ore India Ltd, whose IPO is expected by December, the bid was 0.000001%.

The primary market has surely not reached the stratospheric levels of 2006 and 2007. But at the same time, it hasn’t reached the nadir of 2008. So why are merchant bankers falling over each other to grab a mandate when it is not even worth the piece of paper it is written on.

Since the motive is clearly not money, what is it that is driving these razor sharp brains to bid so low?

The key reason is something called the ‘league table’, brought out by various publications, research entities like EuroMoney, EuroAsia, Financial Times, Dealogic and Merger Markets.

“There are league tables that come. If the government is raising Rs40,000 crore in a year through divestment and my name is not there, then I don’t have the visibility. A company that has a foreign partner will look at it. If you are a serious player in the IPO/FPO market and your name is not there, you stand to lose,” a senior official with a merchant bank, part of a large private sector listed bank, said.

Another merchant banker, this one with a large multinational entity handling the SAIL follow-on issue, said another benefit that such large mandates brought in was the knowledge that could be sold to another company in the same sector.

“If I go to Tata Steel tomorrow, I can tell them of the investors’ outlook for the steel sector if I have handled SAIL,” he said.

“Large private sector issues are not fought on price. But what helps us get them is the experience of having dealt with such public sector issues,” one of the officials quoted above said. Privately, merchant banks rue the ridiculously low fees they are quoting.

Some blame competition, some of them based in India blame their multinational counterparts for spoiling the market, while some say the government is responsible for leaving nothing on the table. Global investment banks like Goldman Sachs, JP Morgan and UBS have been found to be the leaders in quoting incredibly low bids.

“Global investment banks, keen to sell the India story to their overseas clients, find paper of government companies the easiest way to market their agenda as it comes with some kind of an assured return,” an official with a listed local investment bank said.

“It is a prestige issue. Nothing more. We don’t earn anything. It’s a vicious circle but I see no way out. Bids for public sector issues, being very price sensitive, will always stay low. How can you not be part of a government process,” said another merchant banker.
So these deals, seeming penniless on the books, are not struck without a sound rationale. Prestige, wide exposure to data and the sector’s nitty-gritties, and a headstart in meaty public issues from the private sector are factors being eyed when those ridiculously low charges are offered.

Why else would a merchant banker wait for the announcement of SAIL’s merchant banker selection, his suit and tie intact, outside the disinvestments office at 10.30 in the night?

NewsWire18