Edelweiss Financial Services
has withdrawn from a government process to select two pre-IPO transaction
advisors for the mega Life Insurance Corporation initial public offering (IPO)
after concerns were raised over the possible conflict of interest, people with
knowledge of the matter told Moneycontrol.
“Edelweiss has written to the
government and voluntarily opted out of the process following concerns raised
by the government on a potential conflict of interest scenario due to the
firm’s existing life insurance joint venture with Tokio Marine,” said an individual
cited above.
The proposed listing by LIC,
which dominates India’s insurance sector, is expected to be the biggest in the
history of the Indian capital markets. LIC, in which the government owns
95 percent, is India’s oldest and biggest insurer with total assets in excess
of Rs 31 lakh crore.
On July 28, 2020, Moneycontrol reported Deloitte and
Edelweiss Financial Services Ltd had been shortlisted by the
government following technical and financial bids submitted by investment banks
and advisory firms. The process to select the pre-IPO advisors was launched by
the Department of Investment & Public Asset Management (DIPAM) under the
finance ministry.
Established in 2011, Edelweiss Tokio Life Insurance
Co is a joint venture between Edelweiss Financial Services and Tokio Marine,
one of Japan’s oldest and largest insurance companies. The joint venture
runs 121 branches across 91 cities, according to its website.
“The entity where the merchant banking business
rests (Edelweiss Financial Services Ltd) is also the entity that owns a stake
in the life insurance business, which has caused a certain degree of
discomfort,” added a second person. “So in the larger interest, they pulled
out.”
Another person familiar with the matter said after
the withdrawal of Edelweiss, other players left in the process are Deloitte,
Citi, Credit Suisse and SBI Capital. “The government will assess the situation
and take a call on the way forward,” this person said.
All three persons spoke to Moneycontrol on the
condition of anonymity.
Edelweiss Financial Services declined to comment in
response to a detailed email query from Moneycontrol. Moneycontrol is awaiting
a response to an email query sent to DIPAM. A text message sent to a senior
DIPAM official was left unanswered. Deloitte, Citi, Credit Suisse and SBI
Capital couldn’t be immediately contacted. In terms of recent government
mandates, Edelweiss managed the Bharat Bond ETF and is working as one of the
merchant bankers on the Mazagaon Docks IPO.
Rule of the Game
Based on the terms and conditions in the request
for proposal (RFP) floated earlier by the government, it reserves the
right to select only one transaction advisor. “However, if two pre-IPO
transaction advisors are selected and the second transaction advisor selected
on this basis has quoted a lower fee than that quoted by H1, such transaction
advisor will get a fee equal to the fee quoted by him divided by two,” the RFP
says.
In case an investment bank is selected as
transaction advisor for the pre-IPO stage, the same would not be a limitation
on being appointed as BRLM book running lead manager) for the IPO, it adds.
Bids are evaluated on the weightage of marks.
Marks scored by the shortlisted bidders in the technical evaluation and
financial bids are given a weightage of 80 and 20, respectively. “The combined
score of technical and financial bids on Quality cum-Cost Based (QCCB) System
determines the H1, H2, H3, and so on,” the RFP says.
To qualify as an advisor for the pre-IPO deal, a
bidder should have an experience of handling at least one IPO of a minimum size
of Rs 5,000 crore between April 1, 2017, and March 31, 2020, or should have
managed a capital market transaction of Rs 15,000 crore or more during this
period.
Edelweiss had worked earlier on the ICICI Lombard
IPO in September 2017 and the HDFC Life IPO in November 2017.
The definition of conflict of
interest
The government RFP elaborates on the definition of
“conflict of interest” using five illustrations, including a situation in which
the advisor by itself and/or in association with another entity is engaged in
an activity or business or transaction that would affect the interest of the
government or LIC.
The scope of the LIC PRE-IPO mandate includes
advising the government on the modalities of the IPO and the timing, arriving
at an optimal capital structure, preparing restated consolidated financial
statements for the past three years for LIC and its subsidiaries
and structuring the transaction, among other aspects.
The government’s intent to launch
the LIC IPO was announced by finance minister Nirmala Sitharaman in the Union
Budget speech for 2020-21.
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