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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Una Galani
MUMBAI, June 6 (Reuters Breakingviews) - No one told Indian banks about the capital market conspiracy. While advisers in the United States, Japan and China are being accused of "tacit collusion" for charging high underwriting fees, their Indian counterparts are working for almost free. Advisers selling up to $2.3 billion of stock for State Bank of India, the country's largest lender, may take home a token one rupee – equivalent to $0.015.
Overzealous foreign banks, who were keen to build market share and contribute to global league-table rankings, were first to work for so little. As they seek to ditch such practices, local outfits are taking up the great giveaway. IIFL quoted a nominal one-rupee fee to advise on SBI's placement to institutional shareholders, IFR, a Thomson Reuters publication, reported on May 25. Others were asked to match that rate. Bank of America Merrill Lynch and Deutsche Bank are part of the final group on the mandate.
Graphic: No Indian banker fat cats: reut.rs/2rVsUYB
As elsewhere, top government-backed entities like SBI pay the least. The practice of charging a nominal one-rupee fee also extends beyond the equity market and is presented as a patriotic duty –indeed, that is what the former solicitor general charged to represent India against Pakistan in the International Court of Justice, for example.
Things do not look much better working for private issuers. Advisers typically charge between 2 percent and 3 percent for an initial public offering. Around ten banks took home a total of just 1.5 percent working on the September listing of ICICI Prudential, one of the biggest ever. For subsequent share sales, the fees are between 0.5 and 1.25 percent.
That is relatively pitiful. The median underwriting fee in the United States is around 7 percent of IPO proceeds, according to a critical new report by the Paris-based Organisation for Economic Co-operation and Development. The OECD says it is around 8 percent for Japan, and the same even in China – where fees have doubled in a couple of years.
In India, the only consolation is that the absolute volumes of fees are on track to be the highest in five years, as sales of new shares are on the rise. A crowded field of banks means the balance of power is likely to remain with issuers and the riches enjoyed by advisers elsewhere well out of reach.
On Twitter twitter.com/ugalani
- State Bank of India on June 5 launched a share sale to institutional investors to raise as much as 150 billion rupees ($2.3 billion).
- The bank is selling new shares in a price range of 275.76 rupees to 287.25 rupees, in the biggest-ever qualified institutional placement (QIP), according to a deal term sheet seen by Reuters. The share sale was fully subscribed within hours, it added, citing three sources.
- The price range is an up to roughly 4 percent discount to the stock's closing price of 287.25 rupees. Bank of America Merrill Lynch, Deutsche Bank, IIFL, JM Financial, Kotak, and SBI Capital are advising on the transaction.
- IFR, a Thomson Reuters publication, earlier reported that local outfit IIFL quoted the lowest fee of one rupee and the other banks were asked to match that.
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Editing by Quentin Webb and Nicolle Liu