Edelweiss Financial Services Ltd. and IDFC Capital Ltd. pulled out of an initial share sale by India’s second-biggest state-run steelmaker after refusing to match a 1 rupee (2 cent) fee offered by UBS AG (UBSN), two people with direct knowledge of the offer said.
The two banks had to match UBS’s bid to manage the sale under the government’s divestment rules, the people said, declining to be identified because the talks are private. Deutsche Bank AG (DBK) agreed to the fee, they said. The banks were selected to help India sell a stake in Rashtriya Ispat Nigam Ltd. for as much as $250 million, three people said on Sept. 8.
Investment banks can lose about $1 million on Indian state deals that pay near-zero fees, the two people said. Reluctance among local underwriters to work on such transactions may hurt the Indian government’s target of raising $8.4 billion through asset sales this fiscal year. Government-led deals accounted for about half of the amount raised in local stock offers in 2010, data compiled by Bloomberg show.
“Once the markets come back and there are other big deals to work on, more banks will not agree to do state deals at near- zero fees,” said Sandip Sabharwal, head of portfolio management services at Prabhudas Lilladher Pvt. “This kind of fee pricing for state mandates is unsustainable.”
India’s benchmark stock index has lost 20 percent this year after advancing 17 percent in 2010.
$5 for Citigroup
India’s government received pitches from five investment banks to manage the Rashtriya Ispat sale and chose four. Twenty banks bid to manage the $3.2 billion IPO of Coal India Ltd. (COAL) in October last year -- a deal that yielded about $5 each in fees for Citigroup Inc. and the five other underwriters.
Foreign banks provide custodial and foreign exchange services to overseas investors in Indian share sales, which may enable them to make a profit from deals that pay negligible underwriting fees, the people said. Indian underwriters don’t have that additional revenue source, they said.
Banks have also been willing to accept low fees to generate league table credit in India, the world’s second-fastest growing major economy. Bank of America Corp. is the biggest underwriter of stock sales in India in the past 12 months, followed by Citigroup, according to data compiled by Bloomberg.
Spokespeople for Edelweiss, IDFC, UBS and Deutsche Bank declined to comment. India’s Disinvestment Secretary Mohammad Haleem Khan didn’t respond to an e-mail and phone calls seeking comment.
India’s government plans to sell stakes in companies including Oil and Natural Gas Corp. to meet its target of raising 400 billion rupees during the year ending March 2012. It got about halfway to reaching the goal for last fiscal year. Rashtriya Ispat may sell shares in the year beginning April 1, the people said.
This year’s largest IPO in India was a $282 million offering by L&T Finance Holdings Ltd. in July.
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