"Low fees for the public sector deals could be one of the reasons for the poor performance of these issues," said Jagannadham Thunuguntla, head of equities at SMC Capitals.

1. Despite Puny Payday, Banks Vie For Govt Deals
Governments are not known for being the best paymasters, and few are as miserly as India
when it comes to paying investment banks to underwrite share sales by state companies.
Still, despite a payout that will do little more than cover costs, bankers from 20 institutions will
make their pitch in New Delhi this week to be among up to six chosen for a role in the $2.7
billion IPO by Coal India, the world's largest coal miner.
Given the poor performance of some recent state deals as India looks to sell down holdings in
roughly 60 companies over the next few years, the policy of paying rock-bottom fees may be
self-defeating.
Perhaps with that in mind, the government recently adjusted its criteria when selecting banks
and will in upcoming deals refrain from picking underwriters based on the lowest bid.
Instead, the government is assigning a 70 per cent weight to factors such as sector experience,
qualifications and marketing strategy, and 30 percent to fees, banking sources said.
The Department of Disinvestment, which handles asset sales, could not be reached for
comment.
Some recent share sales have paid banks fees of 0.07 per cent, according to sources and
reports, a fraction of what bankers working on deals for privately owned Indian firms or on state-
run sales in China could expect.
With teams of highly paid bankers to pay and costs to cover, from the investor marketing
roadshows to printing application forms, bankers say such fees are barely enough to meet
expenses.
"Sometimes we recover our costs, sometimes we don't," said a senior banker who has worked
on IPOs from state-run firms in the past and is also vying for the Coal India issue.
"It's a market share business. Everyone will be on Coal India, everyone will put their best foot
forward," he said.
While the chosen banks are unlikely to reap a fee windfall on the deal, which could be the
country's largest-ever IPO, they have little choice but to bid to gain league table standing, brand
recognition and follow-on business.
Usual Suspects
The list of banks invited to pitch for Coal India is split evenly between domestic and global
institutions, including usual suspects such as Citigroup, Morgan Stanley, Goldman Sachs and
UBS.
Given its size, Coal India is likely to attract more spirited interest from bankers than the $270

2. million follow-on offer from Engineers India. The government has issued a notice seeking up to
four banks to handle the Engineers India deal.
Earlier this year, state miner NMDC Ltd raised $2.2 billion in a follow-on share sale that made
virtually no money for the banks involved, according to sources with direct knowledge of the
deal.
The offer struggled to attract investor demand, as did the February sale of a $1.8 billion stake in
top electric utility NTPC in a deal that paid fees of 0.07 percent, according to a report by
brokerage SMC Capitals.
"Low fees for the public sector deals could be one of the reasons for the poor performance of
these issues," said Jagannadham Thunuguntla, head of equities at SMC Capitals.
"The motivation required for the banking team is not there."
Rural Electrification, which raised $760 million in a follow-on offer, also paid 0.07 percent,
according to SMC, split among five banks, or about $100,000 for each bank.
By comparison, the Hong Kong portion of Agricultural Bank of China's $30 billion IPO is
expected to generate fees of 1.5 to 2 per cent for banks.
Indian private sector firms are also comparatively generous.
Banks that led the $325 million IPO by developer DB Realty earned 2.13 per cent in fees, while
the $160 million offer by IL&FS Transportation yielded 2.86 per cent, according to SMC
Capitals.
Little Choice
Investment banks in India have little choice but to bid for state business, having aggressively
built up teams to capitalise on the fast-growing economy, often crowding into deals and
accepting low fees to win business.
The three largest Indian equity sales this year have been from state issuers. Local house Kotak
Mahindra worked on all three, while Citigroup, ICICI Securities and Royal Bank of Scotland
worked on two each.
Indian firms raised $20.2 billion from share sales in 2009, a near-tripling from a year earlier,
according to Thomson Reuters data. JP Morgan expects the total to reach as much as $30
billion this year.
Beyond Coal India and Engineers India, state issues in the pipeline this year include offerings
from Steel Authority of India Ltd and Hindustan Copper.
Besides gaining league table standing and brand recognition, banks justify doing cheap or loss-
making deals with the argument that they will lead to flow-based trading business in future and
open doors for follow-on deals.
It also doesn't hurt to be in the government's good graces.

3. "Banks do undercut fees because they want to get associated with the bigger deals and there
are not too many of them here in India," said a senior banker with another foreign bank.