DAM Capital Advisors, a Mumbai-based category-I merchant banker, filed its draft red herring prospectus (DRHP) with the market regulator Securities and Exchange Board of India (Sebi) last week for a proposed offer of sale.
The DRHP provides data and insights underscoring how the current frenzy in the primary market has made merchant banking a lucrative business.
According to the data disclosed in the DRHP providing the industry overview, the book running lead manager (BRLM) fee (expressed as a percentage per deal) has seen a marked increase over the years since FY20 – particularly in the mid-sized issue bracket of ₹500 crore-₹1,000 crore – where the average fee percentage has nearly doubled from 1.6% in FY20 to 3.1% in FY24.
The highest percentage of fees was largely commanded in FY22 and FY23. For instance, 5.5% was the highest proportion of average fees charged per deal in FY22 in the case of small-sized issues of up to ₹250 crore.
Not only has the total fee pool expanded, but the average fee per BRLM has also risen significantly across most issue size brackets. For instance, the average fee per BRLM for issue sizes of ₹1,000 crore-₹2,000 crore has increased by around 2.3 times from FY20 to FY24 (as seen in the table).
The increased demand for merchant banking comes on the back of the increase in the proportion of initial public offers (IPOs) and follow-on public offers (FPOs) in the total number of equity market issuances over the years. For instance, in FY20, 33% of the total equity market issuances were IPOs and FPOs. This proportion increased to 55% in FY22, 59% in FY23 and dropped to 46% in FY24. Capital goods, financial services and healthcare were the top three sectors witnessing the highest number of IPO deals.
The DRHP lists factors such as a strong rally in capital markets, increased participation from retail investors and high-net-worth investors (HNIs), more companies reaching the scale to roll out an IPO, and multiple companies funded by private equity taking the IPO route in recent years to be some of the key drivers for the rising growth in the number of issuances.
All this has meant more business for merchant bankers. For instance, according to the data disclosed in the DRHP, in FY20, DAM Capital Advisors was the investment banker for two IPOs and qualified institutional placements (QIPs), but in FY24, the company had been a BRLM to 17 IPOs and QIPs.
