Leash on i-banks in PSU issues

The department of disinvestment has put severe restrictions on investment bankers seeking to participate in offers of public sector companies.

The new guidelines restrict bankers not just from advising private sector companies in the 'same line of business' on public issues.

They also disallow them from participating in private placements, including qualified institutional placements and overseas instruments like ADR and GDR.

Moreover, advising on issue or placement of debt and convertibles, including FCCBs, will also be prohibited.

A DoD office memorandum dated May 2 and titled 'guidelines for qualifications of advisors for disinvestment process,' now made public, will supersede rules in force since 2001.

DEMANDING PARTNER Merchant bankers advising disinvestment...

* ...Must declare there is no conflict of interest while bidding

* ...Can't take any mandates for private rivals after appointment

* ...Need permission to take private offers even if PSU offers delayed for over 6 months

* ...Should abide by government decision on what amounts to conflict

* ...Feel rules are too onerous

* ...May keep away from smaller issues

The guidelines came into force with the proposed initial public offer of National Buildings Construction Corporation, for which the government asked merchant bankers to bid last week.

According to these rules, merchant bankers bidding for PSU mandates will have to give an undertaking saying 'they are not advising or acting on behalf of or associated with any other person or entity engaged in the same line of business as that of the company being disinvested.'

Also, once the merchant banker is appointed, he cannot take any new mandate in the same line of business without approval of the government, till the completion of the transaction.

The government has the right to decide if a private sector company was in the same line of business as the divesting entity.

If a PSU issue does not hit the market for six months, the government would normally permit the banker to take private sector mandates.

Even here, it has the right to restrict banks 'under some exigent circumstances.'

According to the memo, the 'nature' of transactions that are covered 'may include, but not be limited to, any capital market transaction, including a domestic offering of shares or any other security, whether by way of initial public offer or further public offer, or qualified institutions placement, or issue of IDRs, or by any other manner, as well as the international offering of securities, whether by way of issue of ADRs, GDR s or FCCBs or by any other manner.

The impact of these new rules will be much wider and severe than anticipated earlier, say bankers.

"The conditions are too onerous," said a senior official of a foreign bank.

"There is no clear definition as to what amounts to same line of business. Now, what sector does NBCC belong to?

"Is it a real estate company, infrastructure company or construction company?

"Now, if a private company comes to me for advice, I cannot apply to the government and wait for their permission. He may go somewhere else," the official added.

He pointed out the case of Hindustan Copper, where the bankers were appointed a year ago, but the issue is yet to hit the market. Prithvi Haldea, CMD, Prime Database, a tracker of public issues, said the move will have an impact on the business of merchant bankers.

"I don't think bankers would be interested in taking up these issues, unless you have a prestigious PSU mandate."

According to him , one saving grace could be that there may not be many private sector companies strictly in the same line of business as PSUs that are lined up for disinvestment.

"It depends on how far you stretch the definition."

Several real estate and infrastructure companies are hungry for capital and are in the market to raise money through various routes, including IPOs. Bankers advising these transactions may have to stay away from the NBCC mandate.

"The NBCC issue seems to be Rs 200-300 crore (Rs 2-3 billion) issue.

So, we are not even looking at it. If we get a bigger issue, we may have to go to them for clarity on what the line of business is and what amo unts to conflict etc," said the foreign bank official.

The changes were a sequel to the legal opinion sought after the seeming conflict of interest in the FPO of Steel Authority of India.

Four bankers handling the SAIL issue -- SBI Capital, Deutsche Equities, HSBC Securities and Kotak Mahindra -- were also engaged by SAIL's private sector competitor, Tata Steel, to manage its own FPO.

While Tata Steel successfully raised money in February, the SAIL FPO is yet to hit the market.

Merchant bankers for PSU issues are selected through a bidding system by DoD. Since the mandate typically goes to the lowest bidder, merchant bankers have been quoting near-zero fees to win the large PSU mandates.

In private sector issues, the lead managers earn up to Rs 2-4 crore (Rs 20-40 million), depending on the size of the issue.

This gave rise to concern that merchant banks had an interest in pushing through private sector issues ahead of PSU counterparts, jeopardising the government's money-raising plans.

The SAIL case was referred to the Attorney General. After obtaining legal opinion, the bankers were required to give undertakings, after which the issue is back on track.