Merchant Bankers conflict of interest: PSU or Pvt Companies

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Understanding Deal
New Delhi, 25: Merchant bankers will not be able to carry initial public offer (IPO) and follow on public offer (FPO), of a public sector enterprise and a private entity belonging to the same sector at the same time. According to a leading newspaper, the government has brought this rule to avoid any potential conflict of interest.

The merchant bankers manage out the divestment in PSUs for almost free. For example, during the IPO of Coal India, which was the country's largest IPO at Rs 15,500 crore, the merchant bankers' gross fee was stated as only 0.2% of the float size. Generally bankers charge approximately 3% of the issue size when they are managing a float for the private sector. The advantage of working on PSU float for all the bankers is huge publicity. This ban could force them to reconsider, 'are public floats worth working for less fees?'

There was a controversy during the Steel Authority of India Limited's (SAIL's), Rs 8,000 crore FPO, as the same investment bankers were also working on the private sector rival Tata Steel. Due to the controversy, eventually the government deferred the FPO, which was scheduled to hit the market in January. 

All the merchant bankers selected by the government will have to comply with the restriction covering the date of their appointment to manage a divestment offer till the completion of the issue.

Further more this ban will be applied to bankers when they are handling state-owned companies also.

The report also suggested that the government and the concerned state-owned enterprises will have the sole discretion to decide whether there is a conflict of interest and the contract can be terminated. Meanwhile the bankers have raised their concern on the count that if this is not allowed then issues of private companies will be delayed. These restrictions are not good for the market as a whole.

It is expected that the government will be raising approximately Rs 40,000 crore in fiscal year 2012 through divestment. Further sale of stake in Power Finance Corporation ( PFC), Steel Authority of India, Hindustan Copper and Oil and Natural Gas Corporation (ONGC) has been approved. Other companies like Indian Oil Corporation (IOC), MMTC and NALCO are also expected to be made available for the investors this year.

Our View

The government has rightly brought this rule with the aim to reduce conflict of interest. There should be an addition to the rule that, rather than only allowing the PSUs and the state-owned companies to decide whether there is a potential conflict of interest, a clear mechanism of review by the market regulator should also be placed. Differences in opinion will always arise and it is necessary to clearly state how to resolve it.

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