Dull IPO mkt takes toll on merchant bankers

Written by fe Bureau | Mumbai | Updated: Mar 31 2009, 06:06am hrs
A steep fall in the number of proposed initial public offerings (IPOs), coupled with the downslide in the domestic bourses during 2008, has hit the merchant banking fraternity, with fees plunging 70% in a year. During the calendar year 2008, the total fees charged by India-based merchant bankers dipped to Rs 230 crore, a drop of 70% from Rs 771 crore in the year 2007, according to data compiled by SMC Capitals, the brokerage arm of SMC Global. Merchant banking fees include lead management fees as well as underwriting and selling commission.

Further to this, during the first three months of 2009, there was only one IPO with a volume of Rs 23.84 crore and merchant banking fees of just about Rs 1 crore. According to the study, the average percentage fee range for IPOs of size less than Rs 500 crore is about 3.17% to 3.67% during 2007 and 2008. The average percentage fee range for IPOs above Rs 500 crore is substantially lower, on absolute basis, as the fee works out to significant amounts. In comparison to the overall IPOs, the average percentage of merchant banking fee for IPOs of public sector enterprises is at near-zero rates as the prestige factor in such issues carries a lot of weight and significantly boosts the league table points.

The slide in the stock market since early 2008 has seen the IPO market losing sheen, as companies became jittery about hitting the capital market. Last year, the Bombay Stock Exchange benchmark Sensex skid nearly 50% after scaling an all-time high level of 21,206.77 points on January 10, 2008. The total IPO volume in 2008 dropped 47% to Rs 18,292 crore year-on-year, from Rs 34,386 crore in 2007. When compared with 100 plus IPOs in 2007, the year 2008 has seen about 30 IPOs.

Jagannadham Thunuguntla, equity head, SMC Capitals Limited, said, The business of merchant banking is essentially and predominantly associated with equity products. Owing to the crash in the secondary capital market, even the primary market comprising fund raising came under tremendous stress. Even after the recovery of the secondary markets, it will take at least six months for the primary markets to recover. As the secondary market recovery is not appearing any time soon, the years 2009 and 2010 will remain tough for merchant bankers. Going forward, merchant bankers will try to make money from debt products, advisory services associated with M&As, restructuring and valuations, he added.

During 2008, there is a substantial rise in the merchant banking fees of rights issues to Rs 174.69 crore in comparision to Rs 31.87 crore of 2007, indicating an increase of 448% on an annualised basis. This is largely because of large rights issues from high profile companies such as SBI, Hindalco, Tata Motors, Tata Investment Corporation and Indian Hotels, mainly to fund the acquisitions they have done during 2007, the study stated.

There may be several companies that are eagerly waiting on the sidelines to jump into the IPO as all modes of fund raising, be it debt or private equity, is virtually became impossible to raise, s, Jagannadham said.