High IPO underwriting fees akin to tacit collusion, says OECD

PARIS: Investment banks’ high underwriting fees for raising fresh capital for companies are “akin to tacit collusion” and merit review by competition authorities, the Organisation for Economic Cooperation and Development (OECD) said yesterday.

The Paris-based OECD said that underwriting fees were by far the largest direct cost for an initial public offering and were an often neglected explanation for a drop in overall IPO issuance numbers.

Not only were fees high, but the OECD said it saw signs of parallel pricing, when there is little divergence in prices between companies supposed to be competing.

“High levels of fees and parallel pricing (akin to tacit collusion) appear to have increased. This increases the cost of equity and works against longterm productive investment,” the OECD said in its annual Business and Finance Outlook.

It quoted data showing the median underwriting fee for IPOs in the US is 7% of total proceeds from the IPO and has risen to 8% in Japan and China, doubling in the case of China within a couple of years.

At the same time, European issuers have consistently paid less, with IPO underwriting fees running around only 3%.

“A deeper assessment of the competitive conditions in these markets may be valuable,” the OECD said, adding that authorities could take anti-cartel measures if they found evidence of collusion. – Reuters