Foreign investment banks are showing signs they will be more choosy about bidding for roles to help manage government share sales after the country's largest ever equity offering of $3.6 billion left them splitting a fee of just one rupee.

Measly fees for advisory roles in government share sales are not unusual in India, but bankers say they are struggling now to justify the costs to shareholders in the current environment of low interest rates and rising regulatory costs.

Banks say state share sales - a key plank of New Delhi's efforts to trim its fiscal deficit – tie-up staff for months on end, leaving teams stretched and the advisers out of pocket.

The low fees are also eroding their pricing power in private sector deals, they say.

"The bitter reality is the government deals are the biggest deals in India. If you are not making money on them, how can you justify a rise in cost in India and hire more bankers?" said the investing banking head of a large European bank in Mumbai.

The banker, who declined to be named, said that in the absence of being able to hire more staff, banks would pick and chose large government share sales to "get you some league table credit".

"We are doing just that," he said, reflecting a view shared by other bankers.  

Late last week, seven banks, including four foreign ones, managed the Indian government's sale of a 10 percent stake in Coal India Ltd.

New Delhi is also looking to hire banks to sell minority stakes in five other companies, which could raise a combined $3 billion based on current market values, as soon as this week. The government needs to raise $10 billion by the end of March to reach its fiscal deficit target.

However, in the latest deal, no foreign banks submitted bids to manage the sale of a government stake worth about $900 million in state miner NMDC Ltd. The tender closed on Tuesday with four Indian banks bidding, compared to five sought, a government website showed. When the government sold a similar stake in NMDC in 2012, more than a dozen banks had bid for the business.

Advisory fees on government share sales are not particularly lucrative globally, but India is probably the toughest market, said Tarun Kataria, chairman of advisory firm Cityspring Management in Singapore.

"India is perhaps the only market globally where (government) deals are done for zero fees," Kataria said.

"It's massively sub-optimal for the issuer since the bankers are not sufficiently incentivised to get the best possible price execution from global investors," said Kataria, who was HSBC's India head of global banking and markets until 2010. "In addition, it reduces the banks' bargaining power in private-sector deals."

Aradhana Johri, secretary in the government's Department of Divestment, did not respond to Reuters request for comment.

Privately owned HDFC Bank hired nine banks, including Bank of America Merrill Lynch, JPMorgan and Credit Suisse, for its $1.6 billion share sale launched on Wednesday.

The fee, say people with direct knowledge of the situation, will be 1.2 percent of the total amount raised, which compares with at least 2 percent typically seen a year ago.

All in all, foreign banks are now reluctant to bid enthusiastically for government sales.

"One would have taken pride in doing this a couple of years ago because of the league table credit you get, but today people are under huge pressure to show income," said the equity market head of a foreign bank, who worked on the Coal India offering.