MUMBAI: Large broking houses, with affluent merchant banking arms, are enthused at the prospect of some brisk business in the coming months, with the government looking to sell stakes in more of its companies in the coming months.

The scope for revenues for these firms in the stake sale process of state-owned companies is not from merchant banking per se, but from broking services to investors in these issues, post-listing.

In recent years, state-owned companies have managed to eke out almost free services from the country’s best merchant bankers for raising money through public issues, thanks to the competition among these banks to be the part of large public issues.

While these bankers may publicly claim that the reason behind this could be to add to their experience of managing big public issues, they have a business plan to make up for the losses while providing free services to state-owned companies.
As merchant bankers to share issues, these firms have access to the list of institutional investors that have participated in the public offer. These firms use this privileged information to their advantage, post-listing.

According to a senior official with a foreign investment bank, with an institutional broking unit, “After the state-owned company is listed, the merchant bank’s broking unit helps the participants in the public issue find an exit. Majority of the institutional investors look to sell soon after listing.” Kotak Group, Enam Securities, ICICI Securities, UBS Securities and Morgan Stanley are some of the leading merchant bankers, with a strong institutional broking businesses too.

The government recently said that it plans to sell stakes in around 60 state-owned companies over the next couple of years. By March 31, 2009, it plans to raise over Rs 25,000 crore through stake sales in five companies. The government has hinted that, in 2010-11, large state-owned companies such as BSNL and SAIL may tap the primary market.

Given that up to 60% in an initial public offer is reserved for qualified institutional buyers (QIBs), broking firms, which have merchant banking arms, are seeing an opportunity to make money by being part of these stake sales.

Even as they sense business opportunities, there are concerns over whether the market can handle the large supply of shares or not. Merchant bankers are aware that pricing of these issues, in addition to market sentiment, will be key to keep the primary market and their businesses ticking.