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Global advisors get minimum fee guarantee

Mamata Singh & Sidhartha

To sustain the interest of leading investment bankers in divestment mandates, the government has guaranteed a minimum fee, irrespective of the outcome of a deal.

The "drop dead fee", as it is called, entitles advisors to get a fixed payment even if the divestment process is called off midway.

Thus, the investment bankers' fee structure on divestment deals now comprises a "success fee", which is a fixed percentage of the gross sale proceeds of the government on finalisation of a sale, and the "drop dead fee", which is guaranteed even if the divestment does not take place.

While JM Morgan Stanley will receive a minimum cheque of Rs 7.5 million even if privatisation of Air-India does not take place, the IDBI-ANZ Grindlays Bank-Speedwing consortium, advisor to Indian Airlines, is entitled to a drop dead fee of Rs 8 million in case of Indian Airlines.

Similarly, in the case of Hindustan Teleprinters, KPMG is entitled to Rs 1.4 million. For National Fertilisers, the government has ensured that Rabo Finance gets Rs 750,000, with actual expenses on travel and out-of-pocket expenditure reimbursed even if the deal is called off.

Top investment bankers said though the number of PSUs put on the block has increased, the fee on divestment mandates has declined.

The fees of merchant bankers, however, vary from case to case, depending on the mode of divestment, total realisable value, quantum of work required to complete the transaction, degree of difficulty and chances of success.

"The fee levels are way below the market rates," says Ashish Guha, COO, Lazard India, the global advisor for divestment of ITDC hotels. Intense competition among merchant bankers to bag 'prestigious' mandates has pushed down the rates, he adds.

Spread of information technology, delay in the privatisation process and the fact that privatisation in most developed markets is already over has also exacerbated the situation.

In 1996, the government had recommended giving merchant bankers 3 per cent of gross sale proceeds. The recommendation was made after consulting leading merchant bankers, including Goldman Sachs, Merryll Lynch and Jardine Fleming.

Intense competition has, however, pushed down remuneration levels sharply. CSFB-SBI Caps combine bid for VSNL at 0.21 per cent of sale proceeds and KPMG for 0.3 per cent from the Computer Maintenance Corporation sale. While JM Morgan Stanley will get 0.3 per cent of sale proceeds of Air India, the IDBI-ANZ Grindlays Bank-Speedwing consortium will get 0.294 per cent for Indian Airlines. Lazard India will get 0.45 per cent for ITDC sale.

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