Earlier in July the state sought to pare down its holdings in 10 firms following the issue of two requests for proposals (RFPs). At current share prices the offerings were expected to fetch a handsome Rp190bn ($3bn) for India, which will go some way to fulfilling its Rp410bn divestment quota for the current fiscal year.
Up for sale in the first RFP are shares in Oil India and NMDC (10% each), MMTC (15%), India Tourism Development Corp (12.03%), and Container Corp of India (5%). The second RFP has Hindustan Copper (15%), Nalco and Engineers India (10% each), and NTPC and Bharat Electronics (5% each) on the list.
As is typical, these sell-downs will take the form of an offer-for-sale — a largely automated process run as a day-long accelerated bookbuild on the stock exchange. Bankers play a limited role in these transactions, in which the highest bidders get allocated first until all the shares are sold.
In a bid to speed things up, the department of disinvestment, which oversees the sell-downs, has taken a bundled approach: it will award the mandates for five companies at one go, meaning the winning banks will be tasked with seeking buyers for all five firms, although the sales can take place separately.
But this is more easily said than done, say bankers, especially considering the gap in quality between the companies on offer. It was also part of the reason why foreign banks have shied away, with Deutsche Bank emerging as the only one to submit a bid. The bank declined to comment when contacted.
Local banks have been far more receptive. Deutsche and six Indian banks, Edelweiss, ICICI Securities, JM Financial, Kotak Mahindra Capital, SBI Capital Markets and Yes Bank, indicated their interest in the second RFP, while three are said to have jockeyed for positions on the first RFP, according to bankers in Mumbai.
Most banks have zeroed in on the second RFP as the companies there were seen to possess better credentials than in the first, which had Oil India in the mix. “We would stay away from oil marketing companies right now since the government has yet to clarify its oil subsidy policy,” said a senior Indian banker.
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‘Could backfire’
The banker also lamented that the state’s new approach would complicate matters. “In a way they are forcing the banks to market both the good and bad firms. But it could backfire and hurt the execution as these offerings could end up having to be bailed out by state institutions if they cannot be properly distributed.
“Even if you pay me $3m to sell these companies, if they are not marketable in the first place it will defeat the purpose. Investors have a fiduciary duty to put their money into good companies. Just because a banker is being paid to push these deals down their throats doesn’t mean they have to go for it.”
He suggested that the government rethink its entire divestment strategy and said it should have appointed bankers at an earlier stage to vet the companies first. This would allow the state to pick firms that are commercially ready and acceptable to the market, rather than making decisions on its own.
“There is clearly a difference in the type of companies in the RFPs,” he added. “Rural Electrification Corp and Power Finance Corp have done very well but they have a return on equity of 20% and there is a lot of institutional interest in those stocks. In contrast, a few of the new companies proposed are not even profitable.”
Still, some bankers see a silver lining in this model. “All processes have their pros and cons,” said a banker who joined in the bidding. “The problems won’t deter the divestments from going ahead. The government wants to dish out the mandates first so it can do the sell-downs when the market is right.”
A syndicate banker with a local bank agreed that the government had made the right call with the two RFPs. “Given a choice, the banks would have crowded into all the good companies,” he said. “Maybe bankers will have their hands tied but this is the best way to ensure all the divestment targets get a chance.”
The banker, who submitted bids for both the RFPs, reckons that while it may be challenging, “nothing is impossible”.
“Each person will have a different view when it comes to whether a company is saleable or not. But we see value in both the RFPs, or we wouldn’t have bid for them,” he added.
Token fees
Unlike in previous years, the banks vying for the latest round of divestments have come in with fees, rather than offering to work for free or the token Rp1 that is a common feature on ECM transactions involving the Indian government, bankers said. The mandate will go the bank with the lowest bid.
There may even be a chance for the banks to match the lowest fee submitted, one banker said. “As the financial bids haven’t opened it’s hard to say what each bank is asking for. It is possible that someone could have bid at Rp1 but it is also unlikely as this is a three year assignment,” he said.
However, it is less clear why the foreign banks have steered clear of the bidding. The local syndicate banker said he had heard that as many as five to six foreign banks had been considering it but called off their plans at the last minute. “Perhaps they are busier this time with IPOs or other deals,” he said.
While some bulge bracket firms have noted that low fees were a deterrent, the syndicate banker said that in the past foreign banks had jostled for trades like Power Grid Corp in 2010, which drew Goldman Sachs and JP Morgan, while three foreign banks handled Steel Authority of India, even though both jobs paid just Rp1.
Following the first round of bids, the banks are expected to make their presentations to the committee and submit their technical and financial bids for the divestments soon, with several bankers saying that the results and mandates could be out within a couple of weeks.
In a separate update, the department of disinvestment said it has shortlisted IDBI Capital Markets and SBI to sell a 5% stake in Dredging Corp of India. Both banks are slated to make presentations on August 3, which will be followed straight after by the financial bids.