Digital companies going public are paying higher fees to merchant bankers than traditional companies. Recent Initial Public Offerings (IPOs) from digital firms like Unicommerce eSolutions, Zaggle Prepaid Ocean Services, and Easy Trip Planners highlight this trend. But why are these charges higher, and what does it mean for investors?
Higher Fees for Digital IPOs Compared to Traditional Companies
According to the Prime Database, digital companies are paying significantly more to merchant bankers. For example, Unicommerce eSolutions paid 4.7% of the issue size in fees, Zaggle Prepaid Ocean Services paid 4.2%, and Easy Trip Planners paid 4.1%. In comparison, traditional companies with IPO sizes under ₹500 crore in 2024 paid an average of 3.93%.
This increase in fees is notable because digital companies often operate differently from traditional businesses, especially when it comes to their financial performance.
Why Do Digital Companies Pay More?
The main reason behind these higher fees lies in the extra effort required by merchant bankers to manage IPOs for digital companies. Many of these firms are still in their growth phase and, in several cases, are operating at a loss. This makes it harder to convince investors of the company’s potential. Additionally, compliance and due diligence requirements for digital businesses are more stringent, further driving up costs.
Vaibhav Malik, AVP at a domestic investment bank, mentioned that the new business models of digital companies make it challenging to explain their growth potential and profitability to investors. Hence, more work goes into raising funds through these IPOs.
Government Companies Pay Significantly Less in Fees
In contrast, government companies (PSUs) typically pay much lower fees for their IPOs. Government firms, using a competitive bidding process, pay an average of just 1.3% of the issue size as fees to merchant bankers, making digital companies’ fees seem even higher in comparison.
The differences in fee structures highlight the complexities involved in raising capital for new-age businesses versus established sectors, and why merchant bankers charge more for their services when dealing with digital IPOs.
