IPO market digs a hole on merchant bankers' pockets , fees down 70%
BySunnyVerma
Rahul Ghosh (name changed on request) used to work long hours ever since he joined a Delhi-based
finance firm two years ago. As a merchant banker, his task was mainly to prepare the initial public offer or
IPO prospectus for submission to the securities market regulator Sebi and to see the public issue
succeed.
But things have changed radically in the past six months. I haven t worked on a single IPO since July, he
recalls. It is quite depressing now. The near choking of the IPO market has hit the merchant bankers
rather hard.
The fee charged by merchant bankers, lead managers and underwriters of IPOs have fallen by over 70%
to Rs 230 crore in 2008 year-to-date from Rs 771 crore in 2007, as fewer companies were able to raise
money from the stock markets, data compiled by SMC Capital Ltd showed. Excluding Rs 50 crore
charged for the Reliance Power mega IPO, the fee collected was even lower at Rs 179 crore. Not only
has the absolute fee collection fallen, the percentage of fee charged for a single public issue too have
declined.
As fund raising has become extremely difficult, times have definitely become challenging. The traditional
form of merchant banking, which is predominantly equity related, will wane away in the short term and
slow significantly in the long term, says Jagannadham Thunuguntla, equity head at SMC Capital. The
stock markets have lost over 55% since January 2008 and shares of brokerage firms are down at least
60%. The daily volumes in cash and FandO segments of BSE (^BSESN) and NSE (^NSEI) have fallen to
Rs 40,000 crore now from Rs 1,20,000 crore in January.
The near closure of the primary market has been a major loss to the merchant bankers. Revenue
realisation from public issues account for almost 50% of the revenue of many firms.
Another interesting trend is a significant drop in average % fees from 2.24% in 2007 to 1.26% in 2008
year-to-date. However, Reliance Power IPO of Rs. 11,563 crores during 2008 with the merchant banking
fee of Rs. 50.6 crores amounting to 0.44% of the issue size has a great bearing on this trend. If we
exclude Reliance Power, the % fees during 2008 year-to-date is working out to be 2.66%, the report says.
With the IPO market shut, many of the firms are planning to venture into other areas such as distribution
of bond and fixed deposits to beat the slowdown. Human resource rationalization and no free advisory
services for prospective IPO clients are other ways of conserving that scare cash.
While the fund raising activity has stopped, non-fund raising services such as advisory, de-listing and
valuation may go on. But the revenue realisation from these services is very small and can only help meet
the overheads, Thunuguntla says.
Debt related activity in the merchant banking space may pick up. According to Religare Enterprises Ltd
Group CFO, Anil Saxena, Companies would have to fund innovative ways to survive and once the market
turns those who survived will benefit. Merchant bankers are now focusing on other activities such as
rights issues and merger and acquisitions to beat the downfall on the IPO market side. Saxena said he
could not comment about Religare since the company was yet to start its merchant banking business.
The recent relaxation by Sebi of increasing the validity of its observation on an IPO to 1 year from 90
days would come as a dampener to merchant bankers, although it would certainly help companies
planning to raise capital. This move would reduce the number of times a company might need to go to the
regulator for approval besides pushing the capital raising activity to beyond March 2009, Thunuguntla
said.