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Life of a Merchant Banker - Pg-2

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SEBI has raised concerns on IPO pricing. This was further corroborated by a report released by CAR ratings. Analysis of 116 IPOs between August 2007 and August 2010 revealed that “about 62 percent of IPOs are currently trading lower than the IPO price band”. Are IPOs generally overvalued?

SEBI Chairman did say that merchant bankers should ensure that IPOs are not overpriced.  SEBI also feels that merchant bankers tend to overprice the IPOs because their fees may be linked to the total issue size.  But in most cases, the fees are not necessarily linked to the issue size.  Secondly, the overall issue size may be going up by only 5 to 10 percent because of the perceived higher pricing and the issue management fees could be only 1 or 2 percent of that, and I don’t think that this aspect would really have any bearing on the pricing guidance by the merchant bankers.  Thirdly, the merchant bankers also have to time and again go back to their large key investors - as well as to the retail investors.  If Institutional Investors are disappointed over and over again, then the merchant bankers would face difficulty in raising capital from the markets.  I do not think it is the merchant banker who overvalues the issue. Merchant banks only advise the issuing company on fixing the price band.  Ideally, the price band should be arrived at as a consensus between the issuer company and the merchant bankers.  The promoter naturally believes that he must get the best possible value for his company in the market. Now, the question to address is - what is the best price? Best price can differ in different markets. What was the best price in October last year may not be the best price today, when the markets are down.  For instance, if in October 2010, the offer price of an IPO was Rs.100, and if today it is quoting at Rs. 90 or 80 or even 75, can we blame the decision of fixing the price at Rs. 100, taken in October 2010?  The markets could as well have gone up every month and the stock could have been trading at well above the offer price now - at say Rs. 120 or even higher.

As per a recent article in Outlook Profit, in the IPOs managed since January 2005, SBI Capital Markets has the best performance ratio in terms of outperformers vis-à-vis underperformers at 16:15, whereas all other leading merchant banks have an adverse ratio.  While we would like to take some credit for this, the fact is that most public issues happen in buoyant market.  At the time of issue, it is never in the minds of merchant bankers that the stock would not perform well post-listing.  It is never the approach that once the issue is successful with the best possible pricing, the merchant bankers are not responsible for the stock’s performance.  Otherwise you are not acting professionally.  Also, we have to go back to the same investors time and again.  We also need to stand by our reputation in the market.  When the markets are doing badly, then you will find that many of the recent issues are faring poorly.  In calendar year 2010 there were about 70 odd issues and I think more than 60-70 percent of these are quoting below the offer price, because the markets were doing well then and now the markets are down - especially for stocks of mid caps / small caps and a few sectors like infrastructure.  It is also true that promoters, especially in bullish markets, try to sell the issues at as high a price as possible, since the general sentiments are positive. I wouldn’t even blame the promoters, because everyone wants to get the best possible price for their issue.  Merchant bankers and the issuer discuss different price ranges and then a consensus is arrived and the price band is fixed.  In a buoyant market, if the issue has been launched at - what is later perceived to be - a high price and is well subscribed, I think it would not be fair to blame either the issuer company or the merchant banker(s).  Finally, it is a fact that, between the promoter and the merchant bankers, it is the promoter who aims to secure a higher price.

During the global melt-down in 2008-09, the rating agencies were in the news for all the wrong reasons. Do you think rating agencies still have credibility in the market?

I would say that having ratings is much better than not having them at all.  Their assessment has been wrong at times.  The ratings need to be closely linked to the company’s actual performance, quarter-on-quarter sales / profit and the economic environment in general as well as the growth prospects for the company as well as the sector, etc.  The rating agencies need to analyse the financial projections and accord the company the rating that it truly deserves.

Do you expect consolidation in the merchant banking space, after the Axis-Enam deal?

Yes, Indian merchant banking space is a little too crowded, in terms of number of players.  I think the foreign banks are becoming quite strong and are looking to expanding their presence further in merchant banking here, also because there isn’t much activity happening in developed countries. So there is immense competition.  There are quite a few domestic banks as well and lots of small merchant bankers have also come up.  In the Axis-Enam deal, an investment bank with strong merchant banking capabilities and broking & distribution network has tied up with a large commercial bank, so that the synergies could be exploited.  There could be more such deals happening in the future.

What are the key take-aways from the global crisis for a finance student?

The global melt-down in 2008-09 was a great learning experience for all of us.  The simple learning is - anything which looks extremely bright and rosy needs to be dealt with caution. Everything was going well in the US, when the crisis surfaced - with the real estate loans turning bad.
Lack of prudence on the part of financial sector players - coupled with the relatively weak regulation - aggravated the problem.  Rating agencies were also to be blamed.

The culture of bonuses and performance-linked incentives also contributed to the crisis to some extent, although it would be unfair to single this out as the major factor.  But greed, while it can propel growth and prosperity, has its flip side. India was fortunately not too badly affected, mainly because of our prudent banking policies & practices.

As finance students, you should understand all these aspects of the global crisis, so that you can act in the right manner when you enter the industry.

What according to you, are the skills required to excel in Merchant Banking career?

I think general awareness of the financial markets and knowledge of economics is very important. Domain expertise in a particular sector or capital markets can always be acquired.  But if you are not aware about the developments taking place across the globe, then you will not acquire the overall perspective.  You will not have the broad picture in mind while interacting with clients and other.  You may do well in a niche area like regulatory or compliance, but not overall.  So, my advice is to develop a genuine interest in the happenings in the worlds of finance, industry and economy, and read business newspapers, watch business news channels and keep updating yourself.


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