Underwriters face price war

The Capital Market Supervisory Agency (Bapepam) raised concerns on Friday over the cutthroat "fee war" among players in the underwriting business, particularly in regards bonds issues, which it described as "unhealthy".

While the agency does not view the fee war as posing a systemic danger to the industry, it is still creating a worry as to its potential impact on the quality of underwriting services, said Bapepam chairman Herwidayatmo.

"We'll look into it and invite the players to find out what's really going on and whether or not the trend is normal," Herwidayatmo said on Friday.

"If we find underwriters working for very low fees ... we'll ask them where they get the money to cover their expenses," he said.

He did not provide further details on the meeting.

Underwriting is a service merchant banks provide for the issuance of bond shares. Firms making new issues do not know in advance whether there will be sufficient demand -- from public or institutional investors -- for the shares or bonds at the issue price. An underwriter removes the sales uncertainty by promising to buy any the market does not take up, and charges a commission for this service.

As the amount of commission is determined by the market mechanism, no ruling has been made to standardize fee rates. Recent developments, however, show that many underwriters, particularly for the booming bond issue sector, are offering their services for less and less.

Fees charged by underwriters were typically between 1.5 and 2.5 percent of the value of securities or bond issues, but many are now offering as low as a 0.75 percent commission. -- JP