Post-Covid-19 capital markets boom sees IPO banker fee double for mid-sized deals

IPOs sized below Rs 1,000 crore contribute to more than 50 percent of the IPO pipeline by volume, making it the most active segment on the Indian primary market.

The post-Covid-19 pandemic boom in Indian capital markets marked by a hyperactive initial public offering (IPO) activity has resulted in a near doubling of the fee income earned by investment banks (i-banks) who advise companies on going public.

The Indian primary market has seen 196 IPOs from financial year 2021 (FY21) onwards, resulting in a total fundraise of Rs 2.56 lakh crore.

Since FY20, the i-banks fee percentage has seen a marked increase, particularly in the mid-sized issue bracket of Rs 500 to Rs 1,000 crore where the average fee percentage has nearly doubled from 1.6 per cent (of the IPO size) in FY20 to 3.1 per cent in FY24, according to data from Prime Database and CRISIL MI&A, presented in the draft IPO prospectus of DAM Capital Advisors, which will be the first pure play investment bank to go public.

IPOs sized below Rs 1,000 crore contribute to more than 50 per cent of the IPO pipeline by volume, making it the most active segment on the Indian primary market.

Other segments have also seen fee percentages go up although not as sharp as the growth in the Rs 500-1,000 crore segment.

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For example, in the Rs 1,000-2,000 crore sized IPO segment, the fee percentage for bankers improved from 2.2 percentage in FY20 to 2.7 per cent in FY24, while in the same period the fee percentage in the Rs 2,000-5,000 crore segment increased marginally from 1.5 to 1.6 per cent, data shows.

“This upward trend is evident across other issue sizes as well, demonstrating the growing value that merchant bankers bring to the table in a thriving IPO market,” stated the DAM Capital prospectus.

It is not just the fee percentages that have gone up, data shows that the average fee percentage IPO banker has also gone up significantly.

For instance, the average fee per banker for issue sizes of Rs 1,000 to Rs 2,000 crore has increased by 2.3 times from Rs 4.75 crore in FY20 to Rs 10.93 crore in FY24.

“This increase underscores the enhanced income in the industry, reflecting the heightened demand for skilled financial advisory services in the capital markets,” stated the prospectus .

“Overall, the data clearly indicates that the merchant banking industry is experiencing robust growth, driven by increased market activity and higher fee structures,” it added.

Robust IPO pipeline
As of August, there are 23 companies which had filed for IPO and have received the approval from Securities and Exchange Board of India (SEBI) and estimated issue amount of these IPOs is more than Rs 14,000 crore, as per Prime Database.

Additionally, there are 38 companies, which have filed for IPO, but are awaiting approval from the regulator. The estimated issue amount of these IPOs is more than Rs 83,500 crore.