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• Posted: Sun, Sep 14 2008. 11:01 PM IST

• Corporate News

Investment bankers may miss out on big

bonus cheques this year
Merchant banking fees charged for public issues have fallen 56.35% from 2007, according to an
analysis

Sanat Vallikappen

Mumbai: Those outsize bonus cheques that investment bankers wait for every year—and that make
headlines in newspapers—might be a lot lighter this year as the cyclical nature of the business starts to take
a toll on India’s investment-banking business.
An analysis of data by NEXGEN Capitals Ltd, the investment banking arm of Delhi-based outfit SMC
Global Securities Ltd, shows merchant banking fees charged for public issues transactions have
dipped 56.35% on an annualized basis: from Rs811 crore in 2007 to Rs236 crore year to date. The data
is based on the Rs59,807 crore raised in 2007 compared with Rs37,743 crore, year to date, a 16% drop on
an annualized basis.
Bankers may have to settle for lower or no bonuses after 3 consecutive years
of healthy payouts
Public issues include initial public offerings (IPOs), follow-on public offerings (FPOs) and rights issues, for
which fees have to be disclosed under “material contracts and documents” in the prospectus to market
regulator Securities and Exchange Board of India. This remains in the public domain until the close of the
issue. Fees for mergers and acquisitions, or M&As, however, need not be filed, and have not been captured
in the data.
The fee charged for initial public offerings worth less than Rs100 crore dropped from an average of 3.67% in
2007 to 3.17% of the size of the issue, while those that raised between Rs101 crore and Rs500 crore, saw
average fee gain marginally from 3.33% in 2007 to 3.49%, according to NEXGEN.
For IPOs of Rs501crore to Rs2,000 crore, and those above Rs2,001 crore, the average fee dropped from
2.22% to 1.90%, and from 1.45% to 0.44% respectively. Investment banks typically charge 150 to 300
basis points of the IPO size. One basis point is one-hundredth of a percentage point.
“For the year ahead, there will not be any significant additions to revenues from the capital markets (public
issues),” said a banker who recently quit a global investment bank to start his own boutique bank but didn’t
want to be identified. “If at all I-banks earn significant revenues this year, it can only be from some big-
ticket M&A transaction.”
The drop, say analysts, is largely because of a shrinking pie, setting off a race to seal deals in an
environment already shy of raising funds.
“Look at the competition: With accounting firms also looking to do M&A transactions, there is less to be
shared, and that too in a smaller market,” said K. Sudarshan, managing partner at EMA Partners
International, a global executive search firm.
The drop in fees speaks of hard times ahead, relatively speaking that is, for the so-called masters of the
universe, or investment bankers. Investment bankers—also known as merchant bankers—are key players
who facilitate fundraising, and who have enjoyed about three consecutive years of healthy end-of-year
payouts. They may now have to settle for lower or even no bonuses, warn human resources consultants.
“Over the past three years, bonuses have broadly been 100%-300% of the base salary, and in exceptional
cases, as high as 500%,” said Sonal Agrawal, chief executive officer of Accord India, a human resources
consulting firm. “While nobody has an idea of what it could be this year, the fact that it has been no
extraordinary year for the capital markets means banks have less money in their kitty to pay out.”
Global banks, including Citigroup Inc., Lehman Brothers Holdings Inc. and Merrill Lynch that have
taken billions of dollars in losses as a result of the US subprime mortgage crisis, started downsizing and
cutting costs. “Last year, they had largely insulated India at least as far as bonuses were concerned but this
year bonuses could even drop to zero in some cases,” said Sudarshan.
Another investment banker, who declined to be named, said investment-banking in India has actually added
jobs. “Ramped-up teams mean more takers for the smaller amount that banks are willing to part with as
bonus,” he said.
“Of course, there will be those select few who had come on board during the bull run, and will have a
minimum guaranteed bonus embedded in their contracts,” said Sudarshan. “For others, it’s going to be
bleak.”