DLF IPO sets new commission standards

As real estate developer DLF Ltd markets its $2.4 billion IPO, India's biggest, amid investor fears that property prices could tumble, investment banks are pushing the IPO by paying out unprecedented cash incentives.

Brokers in India typically receive commissions of 0.2-0.4 per cent of the value of IPO shares allotted to their retail clients, but for the DLF issue brokers are being paid commissions of Rs 200-500 per application form - whether or not clients get the shares, say brokers and bankers working on the deal.

"We're paying more than normal, but different deals require different structures," said one banker associated with the issue. A primary market broker for nearly two decades, M A A Annamalai of Akshaya & Co said the incentive structure was new: "We've not heard of this sort of incentive in the primary market." Delhi-based DLF is raising money to buy land and build apartments and shopping malls as India's economy booms.

Its IPO, which opens to retail investors on Monday, is being handled by investment banks including Kotak Mahindra and DSP Merrill Lynch.

The stock should debut early next month. Officials at the banks declined comment. "I was a bit worried initially about the way the IPO would go, but the way bankers are pushing it, it looks like it would sail through comfortably," said one primary market broker

Some in the market are wary given DLF has failed in previous attempts to list because of disputes with minority shareholders, last year's stock market drop and high valuations, but, so far, the deal appears to be going well.

Sources have said the institutional order book was fully covered, with several orders of $200-$500 million and strong interest from domestic fund managers. But many Indian retail investors have been worried by media reports of a slowdown in India's property market.

About 40 per cent of the shares being sold are earmarked for retail and high net worth investors. Rising interest rates and sky-high property prices have slowed house sales, and there is less demand for space in malls and shopping complexes.

HIGH FEES

Bankers have big fees and prestige riding on the DLF deal after the near failure of Cairn India Ltd's $1.18 billion IPO in December, when some investors pulled out late.

While DLF's offer document says commissions for banks would be decided after fixing the IPO price, people with knowledge of the issue said fees would be around 1.5 billion rupees ($37 million), or 1.5 per cent, with potentially more later.

Since the fees are huge, there's nothing wrong in throwing in this kind of money, and it is not a losing proposition," said another banker associated with the issue. Already, DLF shares are trading in the grey market at around 590 rupees, well above the IPO's 500-550 rupee indicated range, brokers said.

"DLF is the best way to get exposure to Indian real estate, given its size, quality and credentials," Edelweiss Securities said in a note recommending subscription to the IPO.

"We consider the company a default play on the Indian real estate as well as a growth story going forward." Others reckon the issue is overpriced. "At the upper band of Rs 550, the stock trades at a significant premium to our base case valuation of 404 rupees," Enam Securities said, rating DLF a sector underperformer.

Via ET