Fee Squeeze Seen in 2011 by Top India Stock Arranger Citigroup

Fees for underwriting stock sales in India may remain near all-time lows as investment banks battle for market share, according to an executive at Citigroup Inc., the top-ranked adviser on equity offerings in the country.

Indian companies paid bankers 0.92 percent of the record $24 billion they raised locally this year in initial public offerings and additional sales as fees, the lowest ratio since Bloomberg began compiling the data in 1999. That compares with 3.5 percent in the U.S. and 2.17 percent in Hong Kong, the largest markets for stock offerings in 2010, the data show.

“On the top end of the deal pyramid, there is serious competition,” Ravi Kapoor, head of Citigroup’s global banking operations in India, said in a Dec. 22 interview in Mumbai. “We will still see sub-optimal fees being charged just to gain market share.”

State-run enterprises that paid near-zero fees in 2010 will continue to dominate India’s equity capital market next year along with infrastructure, manufacturing and services companies, Kapoor said. Citigroup, ranked fifth in the world for share sales, and five rivals accepted fees of less than $6 each to arrange government-controlled Coal India Ltd.’s record IPO.

India was the world’s eighth-largest market for IPOs and secondary offerings this year, Bloomberg data show.

Government-led sales accounted for about half the total amount raised in domestic share offers in 2010, according to data compiled by Bloomberg. New York-based Citigroup maintained its share of local equity sales at almost 16 percent for a second year, the data show.

Halfway to Target

Steel Authority of India Ltd., the nation’s second-largest producer of the alloy, and Oil & Natural Gas Corp., India’s biggest energy explorer, are among companies in which the government plans to sell stock, according to the Department of Disinvestment’s website, as Prime Minister Manmohan Singh’s administration seeks to narrow the budget deficit.

JPMorgan Chase & Co., HSBC Holdings Plc and Deutsche Bank AG are among six banks that agreed to split a fee of less than 0.02 cent for managing a proposed sale of shares in Steel Authority, two people with knowledge of the matter said in September.

Banks must match the lowest fees to win work on state deals, according to government guidelines.

The government has raised 227.6 billion rupees, about half its target for the 12 months through March 31, according to a Dec. 22 statement on the disinvestment department’s website.

Splitting Fees

Goldman Sachs Group Inc. and JPMorgan, both based in New York, were among four banks that earned about 2 rupees each last month for managing a 74 billion rupee sale of shares in state- run Power Grid Corp. of India, the nation’s biggest transmission company.

Citigroup retained its spot at the top of the Indian equity league table after it agreed to split 1,548 rupees in fees with five banks including Bank of America Corp., Deutsche Bank AG and Morgan Stanley for managing Coal India’s 155 billion rupee IPO in October.

The U.S. bank managed 16 share sales in India including offers by Reliance Industries Ltd. and Tata Motors Ltd., compared with 26 by runner-up Kotak Mahindra Capital Co. and 27 for third-ranked Enam Securities Pvt., Bloomberg data show. The figures don’t include rights offers or convertible bonds.

Insurers may sell shares if the government amends rules, including raising the foreign ownership limit to 49 percent from 26 percent, said Kapoor, 48, declining to name any firms. The government’s proposal to raise the cap has been stuck in parliament for three years because of a lack of consensus.

Accelerating Growth

Economic growth of 8 percent to 9 percent would also force companies to seek funding to sustain expansion plans and prepare for acquisitions in India and abroad, Kapoor said. Asia’s third- largest economy may expand 9 percent in the fiscal year that starts April 1, Planning Commission Deputy Chairman Montek Singh Ahluwalia said Dec. 24.

“We will see a continued flow of debt and equity funds into Indian markets next year given the outlook for robust growth,” Kapoor said. Citigroup ranked first among underwriters of overseas bonds in India this year, accounting for 18 percent of the $11.2 billion of deals, according to Bloomberg data.

Stock underwriting and mergers advisory services generate a larger share of investment banking revenue than debt capital markets in India, Kapoor said. Frankfurt-based Deutsche Bank ranked second in managing bond sales, and Edinburgh-based Royal Bank of Scotland Group Plc was No. 3, Bloomberg data show.