Norms for hiring merchant bankers for divestment issues to be eased

Merchant bankers handling private sector companies’ public issues will soon be able to manage the issues of state-owned companies as well with the finance ministry all set to change the norms for selection of bankers for a series of forthcoming share sale in state-owned companies.

As per the proposed new norms, all merchant bankers seeking to manage disinvestment issues, will have to disclose whether they are managing the issue of any private enterprise. The government will have the final say on hiring them on a case to case basis, but the decision making will not be too conservative. If the private company, whose share sale is being managed by the banker, is not in the same segment of a particular industry, it may be hired. For example, if the private company’s issue being managed by the banker is in the crude oil refining business and the disinvestment is in a company present in upstream crude oil production, then the government may still hire the banker as they are in different segments of the hydrocarbon value chain.

Now the government does not hire a merchant banker managing a private company’s public issue if the private firm is in the same sector of the industry. Besides, the government insists that a merchant banker who managed the issue of a private firms can manage a disinvestment issue only after a gap of six months.

?We are considering revising the norms through which merchant bankers will have to disclose the other issues they are handling. The disinvestment department will take a call whether to allow the merchant banker to handle the public issue or not,? an official with the disinvestment department told FE. The official said that if the investment banker is not handling any issue in the same line of business, then the department is likely to allow it to apply. The changed norms will be followed for all future public issues.

The official said, if the investment banker is not handling any issue in the same line of business then the department is likely to allow it to apply. The changed norms will be followed for all future public issues.

The matter was taken up after investment bankers showed lack of interest in managing the 10% share sale of National Building Construction Corporation (NBCC). The government had last year tightened the norms for hiring merchant bankers after allegations of conflict of interest surfaced when bankers to the follow-on public offer (FPO) of state-owned SAIL took up a similar assignment from Tata Steel Ltd in January.

The government then disqualified bankers with share-sale mandates from private firms in a particular sector from bidding for the divestment issues of PSUs in the same industry. The bankers are required under this to certify that there is no such conflict of interest. There also has to be a six-month gap between working on asset-sale mandates and floats by non-state companies in the same industry unless the banks gets government consent. These rules have been keeping investment bankers away from bidding for PSU floats as they earn more fees from the private sector.

In the past, the deadline for submission of proposals from merchant bankers was extended in the case of Hindustan Copper as well. The issue did not receive too many bids before the extension and is yet to be launched.

The FPO of SAIL was originally slated for January, but due to the conflict of interest clause the government has had to delay it. Private sector rival Tata Steel instead got the advantage of good market conditions and comfortably managed to raise money through its FPO.

After the SAIL episode, all leading investment bankers refused to handle the NBCC issue as they already have mandates from non-state companies engaged in similar businesses. Due to lack of applicants, the deadline to appoint merchant bankers has been extended till June 10.

?Construction and real estate sector is a vast field and in such cases the possibilities of merchant bankers having mandates from several companies is high,? the finance ministry official said.

The department is expecting an approval from the law ministry to revise the critical clause on the so-called conflict of interest in the existing norms. The official said that hopefully, the issue will be resolved before the deadline to appoint merchant bankers for NBCC slated for August this year.

The government plans to raise around R40,000 crore by selling stakes in at least six state-owned firms in fiscal 2012?Indian Oil Corporation, Steel Authority of India Ltd (SAIL), Hindustan Copper Ltd, Power Finance Corporation Ltd, Oil and Natural Gas Corporation and National Buildings Construction Corporation (NBCC).