MUMBAI, Oct 10 (Reuters) - Wall Street banks have had enough
of heavy work for puny paychecks on Indian government share
sales - at least when it comes to smaller or difficult deals.
That choosiness comes at a bad time for India, which may
struggle to hit its goal of raising nearly $6 billion from share
sales in state companies by the end of March with investor
demand for new shares expected to remain modest.
Just three banks, all local, bid to run a roughly $300
million stake sale in National Aluminium Co Ltd, said
bankers with direct knowledge of the matter.
Two years ago, by comparison, 10 banks - four of them global
heavyweights - bid to manage a $275 million initial public
offering by state manganese ore producer MOIL Ltd.
That was despite a payday of $3 split among three winning
banks with no reimbursement for expenses. That is a standard
setup for state deals in India, where investment banks can lose
$1 million or more on costs but have played along for league
table credit and the hope of future business.
Now, global banks, weakened after rounds of job cuts, are
shying away from state deals that are too small or difficult to
do purely for credit in industry rankings.
"A couple of years ago, we would bid aggressively for all
the government deals, hoping to win some of them. Today, we
spend a lot of time in deciding the ones we would like to bid
for the mandate," said the equity market head at a leading U.S.
"The reason is simple - why take on additional costs when
the business itself is bad?" said the executive, who like
several other bankers declined to be identified for fear of
losing future government business.
Banks lose money on even the biggest Indian state deals.
Coal India Ltd, which raised $3.5 billion two
years ago in India's largest IPO, paid fees to its six banks
that were not enough to cover a night's stay in a hotel during
the investor roadshow to places like Singapore and Hong Kong.
By comparison, fees for private sector IPOs in India are
between 2 percent and 4 percent of the money raised, while for
secondary share deals they range from 1.5 to 3 percent, banking
sources said. In China, state companies pay about 2.5 percent
for IPOs in Hong Kong, and 1 to 1.5 percent for follow-on sales.
"It's tough to build a sustainable investment banking
business or indeed a sustainable disinvestment process based on
no fees while also bearing all the costs of the offering," said
Tarun Kataria, CEO of India's Religare Capital Markets, who was
previously HSBC's India head of global banking and markets.
LOW FEES, LOW EFFORT?
Bankers have long grumbled in private about New Delhi's
miserly fees. The downside for the government is that it may not
get the best effort from banks, and deals sometimes fizzle.
"There's got to be some incentive to do these deals. If the
banks are losing money on these deals, they won't put in their
best effort," said a banker with an Indian investment bank.
State investors led by Life Insurance Corp of India (LIC)
have ended up bailing out several big share sales that failed to
generate sufficient market demand.
In a botched deal in March, LIC ended up with most of the
shares in a $2.6 billion stock auction in Oil and Natural Gas
Corp that led to finger-pointing over its handling,
with the government coming in for a big part of the blame.
New Delhi can be a difficult client, sometimes ignoring
advice from banks on pricing and timing. The floor price for the
ONGC auction was set at a 2.3 percent premium to its trading
price, giving little incentive to buy.
Many state deals are long in coming to market.
The lowest-ever winning bid was on a share sale by Steel
Authority of India - one-hundredth of a rupee split
among six banks including JPMorgan, Deutsche Bank
and HSBC. That mandate was awarded in 2010
and the deal, worth over $1.5 billion then, is still pending.
"The government is not as flexible as the private companies.
They call us to New Delhi at the drop of a hat for meetings and
despite that some deals take years to get executed, if at all,"
said the equity market head at a big foreign bank in Mumbai.
MORE TO COME
India is in the process of appointing banks to manage share
offerings in four firms - National Aluminium, MMTC Ltd
, Oil India Ltd and NMDC Ltd.
Last month, Credit Suisse was the only foreign
bank among six to pitch for a share sale in Neyveli Lignite
to raise up to roughly $150 million. It is one of the
three banks short-listed for the deal.
The deadline to run the sale of 9.33 percent of trading firm
MMTC was extended last month after drawing a muted response, a
government source said.
Global banks have shied away from MMTC, which is 99.33
percent state-owned and has a price-to-earnings ratio of over
600 times, making it tough to price.
Major banks still covet the bigger state deals.
Last week, India short-listed five banks including Goldman
Sachs, Citigroup and Bank of America-Merrill Lynch
to sell 10 percent of iron ore miner NMDC for roughly
The winners were chosen from 16 bidders including Credit
Suisse, Barclays and Deutsche Bank.
The short list for Oil India's $550 million share sale is
expected next week, and it may see more interest from banks due
to its size and hopes of getting follow-up business, including
M&A advisory, from the cash-rich company, banking sources said.