Size does not matter for i-bankers as fees crash 70%
Mumbai, December 27: Corporate advisory and certification services for re-listing and handing out
employee stock ownership plans (ESOPs) were mandates that top merchant bankers would wrinkle
their noses at, not long ago. There is a rush among merchant bankers to take up any mandates,
regardless of the size or nature of deal, that came their way.
The ego-busting blow was dealt by the primary market slump, which resulted in a drop of over 70%
in merchant banking fees over the past one year. According to a survey conducted by analysts at
SMC Capital, merchant banking fees declined from Rs 771 crore last year to Rs 230 crore in 2008.
However, merchant banking fees on rights issues went up over 440% to Rs 175 crore in 2008,
thanks to several large-ticket issues this year.
The survey also highlights reduction in fees levied (for individual deals) by merchant bankers.
“There is significant drop in average percentage fees from 2.24% in 2007 to 1.26% in 2008 year-to-
date,” SMC Capital’s merchant banking analyst Jagannadham Thunuguntla told.
“However, the Reliance Power issue of Rs 11,563 crore, with merchant banking fee of Rs 50.6
crore amounting to 0.44% of the issue size, has a great bearing on this trend. If we exclude the
Reliance Power issue, percentage fees, this year would work out to be 2.66%,”Mr Thunuguntla
added.
According to sources, average merchant banking fees for large-sized IPOs is around 4% of the total
issue size (inclusive of lead management fees, underwriting and selling commission). “We are
comfortable even in these markets; though there is a slump in equity fund raising, we are working
on several debt placement and private equity deals. We still have our clients coming for advisory
services as well,” said Kotak Investment Banking’s chief operating officer S Ramesh.
The prolonged downturn in the equity market has virtually killed the primary market; the year
ends with a mobilisation of only Rs 16,927 crore, representing a fall of 63% over Rs 45,137 crore
that was raised in 2007, through public equity issues, comprising both IPOs and FPOs. According to
Prime Database, there were only two issues of over Rs 1,000 crore each compared to six last year.
As many as 22 of the 38 issues were of less than Rs 100 crore, of which as many as 14 were of less
than even Rs 50 crore.
“The slump in the primary market has hit merchant banks hard; fortunately, to save the day,
debt-raising (through placements and hybrid deals) has become very vibrant over the past few
months,” Almondz Global Securities’ investment bank head Sharad Rathi said. “In the case of
small debt placement deals (in and around Rs 50 crore), merchant bankers collect about 2% as
fees; bigger deals swing lesser money, say 0.2 to 0.5% of deal size,” he added. According to
sources, apart from advisory and certification services, merchant bankers are also relying on loan
syndication, delisting or relisting services, open offers and valuation assignments to keep the
business running.