Deloitte Touche Tohmatsu Limited charging the Government Re 1 as disinvestment advisory for Bharat Petroleum Corporation Ltd (BPCL) has not gone down well with the investment banking community.

“Deloitte charging Re 1 is not a healthy competition. Regulator should not allow such low bids,” said an investment banker on condition of anonymity. Investment bankers said that the regulator must put a minimum cap on the advisory fee.

Deloitte is helping the government sell its stake in BPCL. According to media reports, SBI Caps was the second-lowest bidder, quoting Rs 15-17 crore.

Deloitte declined to comment on the story. 

This is not the first time such aggressive bidding has been done by an investment bank. Deloitte had quoted a similar price for its services in the divestment process of Container Corporation of India (CONCOR).

JM Financial had charged Re 1 for ONGC’s purchase of the government’s 51.11 percent stake Hindustan Petroleum Corporation (HPCL).

The trend of financial advisers quoting low prices began with the listing of Coal India on the stock exchanges roughly a decade ago. The advisers were paid only Rs 1,500.

Why Re 1 fee?

Bankers told Moneycontrol that the Re 1 pricing has nothing to do with any tangible measure, but has been determined by ‘other factors.’

“Such low bids of Re 1 is largely done for goodwill and since it was a government deal it adds value to company’s profile,” another investment banker said.

Generally, consultation fees varies from sector to sector and company to company.

However, investment bankers said the only tangible measure for fixing fees for large deals is  decided based on the expected time spent on the deal, calculated on hourly basis.

“Fee quotations/pricing for contracts of such large nature by consulting firms are generally determined by estimated time to be spent by various team members multiplied by hourly rates. Further discount or premium is charged, based on client affordability,” said an investment banker of a prominent firm.

Income from IPOs

This year has seen investment bankers keeping busy with many IPOs listing at premium, including that of IRCTC , and the recent CSB Bank .
Deloitte is not a regular merchant banker for private companies and is largely known for advising govt-owned companies such as BPCL and CONCOR.

“For PSUs, a player is needed who is an expert in auditing, due diligence, and offer for sale. This brings auditors like Deloitte in the picture and Deloitte is also a well known global player,” said an industry expert.

For PSU deals, investment banking firms mainly make their earnings on the pre-share sale, audit, risk, and due diligence and forensic audit if needed.

Price fixing of shares on offer for sale is largely at the discretion of Government of India for PSUs, so role of a merchant banker is limited to little in price discovery, more in managing the IPO launch operations.

Further, for PSU IPOs mandate, the main source of earning is the due diligence earnings, and the token service charge of Re 1 is for only the merchant banking part.

Towards early part of 2019, Deloitte alongwith BSR Associates , a KPMG audit outfit were alleged with audit lapses in the IL&FS Financial Services fiasco.

The Ministry of Corporate Affairs had sought to seek a five year ban on the two auditors in this matter before the National Company Law Tribunal.

Source : https://www.moneycontrol.com/news/business/companies/deloittes-re-1-advisory-fee-for-bpcl-disinvestment-irks-peers-4705351.html/amp