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RPT-DEALTALK-Wall St says 'enough' to minuscule India state deal fees

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* India plans to raise nearly $6 bln from stake sales byend-March

* Banks shy away from some deals due to limited resources * Govt extends bid deadline to manage MMTC divestment By Sumeet Chatterjee

MUMBAI, Oct 10 (Reuters) - Wall Street banks have had enoughof heavy work for puny paychecks on Indian government sharesales - at least when it comes to smaller or difficult deals.

That choosiness comes at a bad time for India, which maystruggle to hit its goal of raising nearly $6 billion from sharesales in state companies by the end of March with investordemand for new shares expected to remain modest.

Just three banks, all local, bid to run a roughly $300million stake sale in National Aluminium Co Ltd , saidbankers with direct knowledge of the matter.

Two years ago, by comparison, 10 banks - four of them globalheavyweights - bid to manage a $275 million initial publicoffering by state manganese ore producer MOIL Ltd .

That was despite a payday of $3 split among three winningbanks with no reimbursement for expenses. That is a standardsetup for state deals in India, where investment banks can lose$1 million or more on costs but have played along for leaguetable credit and the hope of future business.

Now, global banks, weakened after rounds of job cuts, areshying away from state deals that are too small or difficult todo purely for credit in industry rankings.

"A couple of years ago, we would bid aggressively for allthe government deals, hoping to win some of them. Today, wespend a lot of time in deciding the ones we would like to bidfor the mandate," said the equity market head at a leading U.S.bank.

"The reason is simple - why take on additional costs whenthe business itself is bad?" said the executive, who likeseveral other bankers declined to be identified for fear oflosing future government business.

Banks lose money on even the biggest Indian state deals.

Coal India Ltd , which raised $3.5 billion twoyears ago in India's largest IPO, paid fees to its six banksthat were not enough to cover a night's stay in a hotel duringthe investor roadshow to places like Singapore and Hong Kong.

By comparison, fees for private sector IPOs in India arebetween 2 percent and 4 percent of the money raised, while forsecondary share deals they range from 1.5 to 3 percent, bankingsources said. In China, state companies pay about 2.5 percentfor IPOs in Hong Kong, and 1 to 1.5 percent for follow-on sales.

"It's tough to build a sustainable investment bankingbusiness or indeed a sustainable disinvestment process based onno fees while also bearing all the costs of the offering," saidTarun Kataria, CEO of India's Religare Capital Markets, who waspreviously HSBC's India head of global banking and markets.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on divestment and proceeds, fiscal deficit: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> LOW FEES, LOW EFFORT?

Bankers have long grumbled in private about New Delhi'smiserly fees. The downside for the government is that it may notget the best effort from banks, and deals sometimes fizzle.

"There's got to be some incentive to do these deals. If thebanks are losing money on these deals, they won't put in theirbest effort," said a banker with an Indian investment bank.

State investors led by Life Insurance Corp of India (LIC)have ended up bailing out several big share sales that failed togenerate sufficient market demand.

In a botched deal in March, LIC ended up with most of theshares in a $2.6 billion stock auction in Oil and Natural GasCorp that led to finger-pointing over its handling,with the government coming in for a big part of the blame.

New Delhi can be a difficult client, sometimes ignoringadvice from banks on pricing and timing. The floor price for theONGC auction was set at a 2.3 percent premium to its tradingprice, giving little incentive to buy.

Many state deals are long in coming to market.

The lowest-ever winning bid was on a share sale by SteelAuthority of India - one-hundredth of a rupee splitamong six banks including JPMorgan , Deutsche Bank

and HSBC . That mandate was awarded in 2010and the deal, worth over $1.5 billion then, is still pending.

"The government is not as flexible as the private companies.They call us to New Delhi at the drop of a hat for meetings anddespite that some deals take years to get executed, if at all,"said the equity market head at a big foreign bank in Mumbai.

MORE TO COME

India is in the process of appointing banks to manage shareofferings in four firms - National Aluminium, MMTC Ltd, Oil India Ltd and NMDC Ltd .

Last month, Credit Suisse was the only foreignbank among six to pitch for a share sale in Neyveli Lignite

to raise up to roughly $150 million. It is one of thethree banks short-listed for the deal.

The deadline to run the sale of 9.33 percent of trading firmMMTC was extended last month after drawing a muted response, agovernment source said.

Global banks have shied away from MMTC, which is 99.33percent state-owned and has a price-to-earnings ratio of over600 times, making it tough to price.

Major banks still covet the bigger state deals.

Last week, India short-listed five banks including GoldmanSachs , Citigroup and Bank of America-Merrill Lynch

to sell 10 percent of iron ore miner NMDC for roughly$1.5 billion.

The winners were chosen from 16 bidders including CreditSuisse, Barclays and Deutsche Bank.

The short list for Oil India's $550 million share sale isexpected next week, and it may see more interest from banks dueto its size and hopes of getting follow-up business, includingM&A advisory, from the cash-rich company, banking sources said.

(Additional reporting by Manoj Kumar in NEW DELHI and ElzioBarreto in HONG KONG; Editing by Tony Munroe and Ryan Woo)

((sumeet.chatterjee@thomsonreuters.com)(+91-22-6180

7068)(Reuters Messaging:sumeet.chatterjee.reuters.com@reuters.net))

Keywords: INDIA DIVESTMENT/BANKS