Equity capital market (ECM) activity jumped over 50 per cent in the first half (H1) of calendar year 2020 led by big-ticket transactions of large companies such as Reliance Industries (RIL) and Hindustan Unilever (HUL). However, ECM fee collection dipped 7 per cent as investment banks sacrificed fees to bag bigger mandates.
ECM underwriting fees stood at $96 million in H1, 6.7 per cent lower than the corresponding period in 2019, according to Refinitiv, a financial-information provider. This comes at a time when equity capital raising jumped 52 per cent, just surpassing the $20 billion mark and almost nearing 2019’s full-year tally.
ECM activity covers any equity fundraising transaction such as initial public offerings (IPOs), rights issue, qualified institutional programmes (QIPs), and block sales.
Market experts said the dip in fee collection was because of lower share of IPOs in the overall ECM pie. So far this year, only one IPO — that of SBI Cards — has hit the market. ECM activity was largely boosted by block sales.
“What we have seen this year are predominantly follow-on offerings like rights issues, QIPs, and block deals. The fee is much higher for IPOs than for any subsequent offerings as the effort involved and time taken by investment bankers for IPOs is higher. Also, large-listed companies always bargain hard on fees. Going forward, the IPO market must revive for fee income to increase,” said Pranav Haldea, managing director of Prime Database.
Some of the top ECM transactions in H1 were RIL’s rights offering, $3.4 billion worth of stake sale in HUL by GlaxoSmithKline, $2 billion QIP in Bharti Airtel, $1.4 billion IPO of SBI Cards, and $1.15 billion stake sale in Bharti Airtel by its promoter Bharti Telecom.
“The bulk of the activity this year comprised of block deals. The fee for block deals is lower than QIPs and IPOs. Block deal is just a placement transaction. At the most, you will get 50 bps (basis points) if the marketing is to be done. The effort is only towards marketing; there is no other documentation or Sebi (Securities and Exchange Board of India) process involved. For a QIP, you have to prepare a document and take it to the stock exchanges. Going forward, there could be some rights issues, but they don’t fetch much (in terms of) fees unless underwriting is involved,” said Pranjal Srivastava, independent capital markets professional.
Market players said the deal-making during H1 was boosted by improvement in foreign portfolio investor (FPI) sentiment. After a record sell-off in March, foreign investor buying picked up in the June quarter. Most equity share sales in large companies saw huge FPI participation.
“ECM activity has been driven by appetite from FPIs, who are looking at India as a priority region within emerging markets, and wanted to buy stakes in quality, large-cap names, especially in sectors that were beaten down and offered attractive valuations over the long term,” said Samir Bahl, chief executive officer of Anand Rathi Advisors.
Bahl said the June quarter results may be a “reality check” and impact ECM sentiment. The coming quarters might see QIPs and rights issues in the large-cap space, but mid- and small-cap firms’ valuations and activity will continue to lag for the foreseeable future, he added.
JP Morgan emerged as the ECM table topper in H1. It handled share sales worth $3.3 billion, 3.5 times more than the corresponding period last year.