Market slowdown affects merchant bankers' wallets

Press Trust of India / New Delhi September 11, 2008, 3:26 IST

The recent slowdown in the primary market has impacted not only investors but merchant
bankers as well, with a significant decline of nearly 60 per cent in their percentage fees so
far this year.

“There is a clear drop in merchant-banking fees to Rs 216 crore in comparison with Rs

771 crore in 2007, indicating a drop of 57.9 per cent annually,” Nexgen Capitals, the
merchant-banking arm of brokerage firm SMC Global Securities, said in its latest report.

Merchant bankers are those who advise the issuer about the public offer and manage it.

The average percentage fees has declined 1.21 per cent so far this year from 2.24 per cent
in 2007, the report added.

The Reliance Power initial public offer (IPO) of Rs 11,563 crore this year with a
merchant-banking fee of Rs 50.6 crore, that is, 0.44 per cent of the issue size, had a great
bearing on this trend, the report said.

“If we exclude Reliance Power, the percentage fees in 2008 so far has turned out to be
2.59 per cent,” it added.

For an IPO of less than Rs 500 crore, the average percentage fee range has been between
3.17 per cent and 3.67 per cent in 2007 and 2008.

Though the average percentage fee range for IPOs above Rs 500 crore is substantially
lower, on an absolute basis, the fee works out to be a significant amount, the report
added.

The report further highlights that overall, the average percentage of merchant-banking fee
for IPOs of public-sector enterprises is at near-zero rates as prestige in such issues carries
a lot of weight and significantly boosts the league table points.

So far this year, the average percentage fees of public-sector IPOs stood at 0.23 per cent,
while in case of private-sector IPOs (including Reliance Power), it was at 1.30 per cent,
while the average percentage rises significantly to 3.41 per cent when the Reliance Power
IPO is not taken into consideration.
In 2007, the top-10 IPOs ranked on the basis of fees include DLF (1.89 per cent), HDIL
(3.48 per cent), Mundra Port (2.48 per cent), Idea (1.35 per cent), Brigade (4.03 per cent),
IVR Prime (3 per cent), Omaxe (4.12 per cent), Purvankara (2.45 per cent), BGR (3.44
per cent) and Fortis (3.02 per cent).

So far this year, the top-10 IPOs on the basis of fees include Reliance Power (0.44 per
cent), KSK Energy (4.19 per cent), IRB (2.79 per cent), Future Capital Holdings (3.25
per cent), GSS America (8.43 per cent), On Mobile (3 per cent), Gammon (2.24 per cent),
Shriram EPC (3.77 per cent), Gokul Group of Companies (3.54 per cent) and Sejal Glass
(4.63 per cent).

Meanwhile, primary market-tracking firm Prime Database had said that uncertain market
conditions since mid-January this year have dampened investors’ appetite so much that
about 74 firms, including Reliance Infratel and MCX are now holding back their IPOs,
that are expected to together raise over Rs 43,000 crore, till good time returns.

The negative trend in the primary market was in tune with the movement in the
secondary market. The Bombay Stock Exchange benchmark index Sensex has lost as
much as 45.60 per cent till August 29, from January 10 when it hit its lifetime-high of
21,206.77 points.