Road developers turn to underwriting for faster financial closure

More and more road developers are seeking underwriters for their road projects in order to achieve financial closure faster and bid for more national projects

With the National Highways Authority of India (NHAI) insisting on financial closure of existing projects—or at least a financial assurance for these projects—road developers are looking at banks to underwrite or syndicate debts for their projects. Bankers too seem more than happy to do so.

“We could see more (underwriting) for them (road projects) in FY11, especially with more and more projects coming up and with NHAI coming up with new bidding norms,” said Ashish Chandak, executive director- infrastructure banking (corporate finance), Yes Bank. A similar trend has been observed by two other bankers, who requested anonymity.

In the underwriting or syndication process, a bank underwrites the entire debt for a certain project, for a certain fee. The bank then seeks funds from other banks for the debt. This helps the developer tie up funds for projects easily and thus enables work on a project to move along at a faster pace.

Hindustan Construction Company (HCC) and Gammon Infrastructure Projects Ltd (GIPL) are two such road companies who are in favour of underwriting. “We are surely open to the option of underwriting,” said Parvez Umrigar, managing director, GIPL.

Praveen Sood, CFO, HCC, had stated last week, “We are looking for underwriters. A number of banks have shown interest in underwriting our projects. We have almost finalised the bank for one of our projects, which we would be announcing in a couple of days.”

However, there are companies like IRB Infrastructure who still prefer the traditional method of financial closure. The road development company announced financial closures for all three projects it was working on. “We are not looking for underwriting, we would be achieving financial closure for our three road projects in this month through the normal procedure,” V Mhaiskar, managing director, IRB Infrastructure, had told Moneylife last week.

While underwriting is surely a lucrative option for road companies to enable them to bid for more projects, banks too are looking at the brighter side of such ventures. “If it is a good project, the banker is happy to get the extra amount in the form of an underwriting fee,” stated Mr Chandak.

“We have received very good response from banks,” stated Mr Sood. According to sources, Axis Bank, United Bank of India and Bank of Baroda are among the other banks interested in the underwriting process.

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Can relationship managers of banks replace independent financial advisors?

Banking channels are starting to gain a foothold for selling mutual funds, but will this new distribution model help out investors?

Many private banks are already selling mutual funds (MFs) and now public sector banks are planning to enter this space. According to media reports, the country’s largest public sector bank, State Bank of India (SBI), has trained some 18,000 employees to sell MFs.

But can the new banking foot-soldiers be as good as independent financial advisors (IFAs)?

A relationship manager (RM) needs to have a minimum qualification of an MBA. The remuneration he would get—on an average—is Rs15 lakh per annum.

Considering the remuneration, the RM has to generate 10 times his salary as business to justify his package—a revenue of approximately Rs1.5 crore. If the RM achieves his target or even exceeds it, then he may be promoted to a higher branch where more high net-worth individuals (HNIs) would be available. If the RM does not achieve his target, he may be moved to a suburban branch. So an investor would come across new faces every year.

“Banks factor (in) every cost into the employee. I know of many banks who calculate the average rent they pay per employee for the premises that they are using. When the market was in a bull run, banks used to churn clients’ money three to four times and easily earn 2.25% brokerage,” said a distributor.

When asked about the recent Securities and Exchange Board of India’s (SEBI) diktat on upfront commission, a distributor described the market watchdog’s rules as “working towards systematic elimination of brokers and intermediaries.”

Before the ban on entry loads, MF distributors were providing door-to-door services to their clients. After SEBI banned entry loads and subsequently cracked down on upfront commissions, distributors can only hope to profit from trail commissions (an insignificant amount, which again depends on the MF client staying invested with the distributor).

Most IFAs have developed a good rapport with their investors in the area which they operate, so the chances of any mis-selling can be less. Even if they do indulge in mis-selling, they remain with their establishments, while relationship managers have to work keeping in mind the ambitious targets set by bank managements.

“On an average, you get to meet one relationship manager for one year. Then you have a new face (in the bank), while an IFA cannot keep hopping from one colony or housing complex to another by mis-selling to clients he meets. His bandwidth to source new clients is limited,” said Rajesh Krishnamoorthy, MD, iFast Financial India.

SEBI has brought about sweeping changes in the MF industry over the past few months. The latest move mandating asset management companies from paying upfront commissions from load accounts to distributors is yet another dampener for IFAs.

“India definitely needs regulation for financial advisors. What is important is that regulatory changes must not force the choice of any particular distribution channel on the investor,” suggested Mr Krishnamoorthy.

“The cost of losing a client is a lot higher than the revenue from a ‘high commission’ bearing product,” he added.

Moneylife had earlier reported on how banks have indulged in mis-selling of products and how they get direct access to accounts of their banking clients for selling MFs.
(For more, read here and here)

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COMMENTS

santosh

5 years ago

good work by ML. originally wanted to post this even for the article"fidelity exit a slap for sebi..." All large MFs want the IFA/ small distributors and small MFs to shut down. once banks become the only channel and only the larger MFs remain, the business will become super profitable, as by then suddenly you will find, RBI and SEBI acting together to kill bank commissions from Mf sales as well as churn. Don't dismiss it as a conspiracy theory, think about it!

sunil hemnani

6 years ago

Well the fact that SEBI has put in time to bring about a change in our way of investing in mutual funds.Very often an organisation sets out to do some good by setting an ordinance just because some IFA agents have been found out.What happens very often is people are misguided into mutual fund investments by relationship managers with the intent that money in sb a/cs are better off in SIPs and so on.How often we get misguided by stock- brokers well its these modern day banks which will soon attack from all fronts.IFAs are definately a lesser evil in this messy world of mutual funds.

Food inflation rises to 16.35%

Rise mainly driven by pulses, which became dearer by 31.55%

Food inflation rose marginally to 16.35% for the week ended 20th March mainly on account of high prices of pulses and milk. Inflation stood at a four-month low of 16.22% for the week ended 13th March, reports PTI.

The rise in food prices was mainly driven by pulses, which became dearer by 31.55%. Milk prices rose by 18.74% on a yearly basis.

On a weekly basis, the index for food articles rose by 0.6% due to higher prices of barley and milk (3% each), moong and condiments and spices (2% each), along with urad and arhar (1% each).

The overall inflation has been relentlessly rising and was at 9.89% in February, up from 8.56% in January. The rise in inflation has been mainly attributed to high food inflation and the recent hike in fuel inflation after the increase in excise and customs duty on petrol and diesel.

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