Bankers' fees for IPOs lowest in seven years

In the first nine months of 2017, investment banks pocketed Rs 500 crore for helping companies raise Rs 30,853 crore through IPOs.

While volumes on Deal Street have seen a sharp improvement over last year, it hasn’t necessarily translated into a huge windfall for investment banks - the reason being a sharp reduction in fees charged by banks to manage initial public offerings (IPOs).

This year, investment banks have charged 1.6 per cent of the amount raised through IPOs as fees.

In comparison, investment bankers had charged two per cent last year and 3.1 per cent in 2015.

The average fees this year is the lowest in seven years.

In the first nine months of 2017, investment banks pocketed Rs 500 crore for helping companies raise Rs 30,853 crore through IPOs.

For the whole of 2016, they got Rs 550 crore for raising just Rs 26,493 crore.

Investment banks have let go of margins for higher volumes.

An analysis of fees paid for each of the 24 IPOs this year shows fees have been less than 100 basis points (bps) for big-ticket offerings.

ICICI Lombard, SBI Life Insurance, Avenue Supermarts and Hudco have each paid less than 100 bps.

“Currently, there is a lot of competition for IPO mandates. Typically, the fees paid for big-ticket deals are always less compared with small- and mid-sized issues.

We needn’t worry about the money earned, as a shortfall in the fee would be compensated by large volumes,” said an investment banker.

In two-three IPOs this year, one or two banks were quoting steep discounts and others were asked to match those offers to get the mandate, he said.

Another important factor behind low fees this year has been the IPOs of state-owned entities.

Traditionally, fees paid for large PSU (public sector undertaking) offerings are minuscule as bankers consider them as “trophy mandates”, which help improve their league table standings.

For instance, bankers were paid less than 0.5 per cent fees for the Hudco and Cochin Shipyard IPOs.

Sources said the fees paid were even less for the offers of General Insurance Corporation and New India Assurance.

In the past, bankers had handled some of the large PSU offerings such as of Coal India for near-zero fees.

On the contrary, fees for handling small or mid-sized IPOs have been more than three per cent in most cases.

Despite a decline in average fees, market participants said an increase in volumes over the past two years had provided the much-needed breather for investment banks, which had been reeling under pressure since 2011 due to subdued activities in the Indian capital markets, along with escalating input costs.

In fact, the stress was so high that a lot of banks had to downsize their headcount.

Some of the international banks have shut their Indian offices and continue to operate from Asia-Pacific centres such as Singapore and Hong Kong.

However, the situation now seems to be improving. Currently, there are about 10-15 active investment banks, against the long-term average of seven-eight.

Photograph: Adnan Abidi/Reuters