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IPO intermediaries are the parties (companies/individuals) that assist an issuer in completing an IPO and a successful listing. Major IPO intermediaries include merchant bankers, registrars, bankers, underwriters, and market makers.
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IPO intermediaries provide services to help a company initiate and complete the IPO process and get listed. IPO prospectus documents detail the involvement of all parties in the IPO.
These intermediaries act as a bridge between the company and investors and coordinate with other intermediaries and parties to ensure a smooth IPO process.
The issuer of an IPO is a private company that wishes to go public and issue new shares or sell existing shares to the general public for the first time through an IPO. Generally, an issuer is a company that offers securities to raise capital.
Three categories of issuers can conduct an initial public offering:
A stock exchange is a company that provides a trading platform where investors can buy and sell equity shares, bonds, ETFs and other listed securities. Exchanges match buy and sell orders and provide a legal guarantee for transactions.
The Securities and Exchange Board of India (SEBI) regulates the exchanges. SEBI sets the rules and regulations for the exchanges and ensures that the exchanges follow them. BSE and NSE are the two most prominent stock exchanges in India. Check out the list of stock exchanges in India.
Exchanges appoint stock brokers who work as intermediaries between investors and the exchange. An investor (individual or institutional) must have an account with a stock broker to trade on a stock exchange.
SEBI (Securities and Exchange Board of India) is a regulatory body for the capital market in India. It is a government organization established by Government of India
" ...to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected there with or incidental there to".
Any company seeking to raise more than Rs 50 lakhs through an IPO has to submit a draft offering document to SEBI for approval. The company must submit its offer within a window of 12 months from the date of SEBI's approval.
Below are some clarifications issued by SEBI on public issues for investors and issuers:
*IPO Due Diligence is the gathering and reviewing of information about a company or business. It is obtained from all parties assisting the company in the IPO process.
Merchant bankers are independent financial institutions registered with SEBI. They assist companies in their IPO from start to end. They are also called Lead Managers or Book-running Lead Managers(BRLM). An IPO can have one or more lead managers.
A merchant banker assists a company throughout the IPO process, from due diligence and determining if the company is eligible for an IPO, to applying for an IPO with the exchanges, to preparing a prospectus, IPO advertising, road shows, marketing, and the post-listing process.
A lead manager's role in an IPO can be segregated into two categories as Pre-Issue and Post-Issue.
Pre-Issue Responsibilities of a Merchant Banker as lead manager
The issuer company appoints banker/s to help them manage the funds collected in the IPO process and transfer them to the Escrow Account, Allotment Account or Refund account as the case may be. A company can appoint one or more bankers to the issue that are registered with SEBI. Check out for the list of SEBI registered Bankers to an Issue.
The responsibilities of the bankers to an Issue include the below:
Self-Certified Syndicate Banks commonly referred to as SCSBs are the SEBI registered banks that provide ASBA services to the investors. With ASBA mandatory for IPO application, investors can apply for an IPO provided they have an account with any of the bank that offers the facility of ASBA.
The investors can apply online by using the Netbanking services of the SCSB or offline by submitting the form to the nearest branch. The main responsibilities of the SCSB include the following:
The IPO registrar is an entity that assists the issuer in the allotment of IPO shares and maintains records of the company's shareholding.
The IPO Registrar is responsible for the final allotment of shares in consultation with the issuer company and the stock exchanges after preparing a list of valid and invalid IPO applications. Here you can find the list of IPO registrars in India.
Once the shares are listed, the Registrar also maintains a list of registered shareholders for the listed companies. For this task, they are called 'Share Transfer Agents'. They maintain information such as the shareholder's name, contact information, and dividend information (if any).
The RTA's job is to keep proper records of the shares and make changes as needed to reflect true ownership of the securities by making name changes, endorsements, etc.
An IPO underwriter is an intermediary that undertakes the risk of purchasing the shares in case of the IPO under subscription.
IPO underwriting is a process wherein the underwriter and the issuer company get into an agreement wherein the underwriter agrees to purchase the unsold shares of an IPO in return for an underwriting commission.
The underwriting commission is a fee charged by the merchant banker in its capacity as underwriter for entering into the underwriting agreement. It is the fee charged by an investment banker for underwriting an issue of securities.
For example, if it was agreed between the underwriter and the issuer that the underwriter would be responsible for selling 3% of the shares offered, and the underwriter is unable to sell all of the shares, the underwriter would be responsible for the unsold shares and would have to purchase them from the issuer.
**Share valuation means determining the value of a company's shares in an IPO by the issuer company. IPO shares can be overvalued or undervalued. Overvalued securities are those that are trading above their market value. Undervalued securities are those that are traded below their market value.
In SME IPOs, underwriting is mandatory. In most cases, the merchant banker acts as an underwriter for SME IPOs. At least 15% of the shares offered in an SME IPO should be underwritten by the underwriter.
In the case of a mainboard IPO, underwriting is optional.
IPO Underwriting Process Steps
Market makers are licensed stockbrokers (NSE list | BSE list) who buy or sell stocks in the stock market at specific prices to improve liquidity and price discovery. They provide liquidity in thinly traded stocks. They also monitor the trading in the script and report to the exchange when irregularities occur.
Market-making is mandatory for SME IPOs and voluntary for main board IPOs. Most SME stocks face liquidity issues that could make it difficult for investors to exit. Market makers are here to help.The market makers helps with this.
Market makers are paid by the issuing company for the risk they take. The risk includes a market maker buying shares from a seller in the market and the share price begins to fall and the market maker not being able to find another buyer because of the price fluctuation, so the market maker takes a loss on the unsold shares.
Market makers are also allowed to place 2-way orders (buy and sell) simultaneously. For example, they can place an order in the range of Rs.98-100. They will buy shares at 98 and sell them at 100.
The lead manager introduces the market makers to the issuing company. They provide the market makers' details in the DRHP document. The issuer company pays a fee to the market makers.
As per exchange (NSE and BSE) guidelines, a market maker:
Points to Note
Depositories are the financial institutions that hold the shares in electronic form. In India, there are two depositories, NSDL and CDSL.
The issuer company enters into a tripartite agreement with both the depositories individually and Registrar. Depositories play an important role in smooth execution of managing of IPO shares. The main responsibilities of the depositories include the below :
In an IPO, a merchant banker is responsible for determining the eligibility of the issuer to file an IPO and appointing intermediaries such as bankers, legal counsel, auditors, registrars, compliance offices, etc. The Merchant Banker is also responsible for preparing the IPO prospectus and advertising the IPO.
Market Makers help listed companies improve liquidity and price discovery of the stock. They are registered members of the stock exchange (usually stockbrokers) who buy or sell securities on the stock market at specified prices at any time.
Roles of Market Makers
An issuer can appoint one or more than one merchant banker (lead manager) for the IPO process. The following is the number of merchant bankers an issuer can hire depending on the issue size:
Issue Size |
Maximum number of Merchant Bankers |
Below Rs. 50 crore |
2 |
Rs. 50 to Rs. 100 |
3 |
Rs. 100 to Rs. 200 |
4 |
Rs. 200 to Rs. 400. |
5 |
Rs. 400 and above |
More than 5 |
The merchant bankers appointed as lead managers to an IPO are referred to as book-running lead managers.
Depending on the size of the issue, a company can appoint more than one book-running lead manager for an IPO. The lead managers are the merchant bankers responsible for planning the entire IPO process.
If there is more than one lead manager for an IPO, their roles and responsibilities are set out in the offering document.
A lead manager in an IPO is a SEBI registered merchant banker appointed by the issuer company, to assist the company manage the entire IPO process.
A lead manager plays a key role in the successful implementation of an IPO from planning, execution to post IPO and trading phases. The responsibilities of the lead manager includes the below:
The lead manager in an IPO is the merchant banker who is responsible for managing the entire process.
The services of a lead manager are compensated by the issuer through the payment of IPO lead manager fees. This fee is determined between the issuer and the lead manager and varies from company to company.
Lead manager role in IPO:
IPO Book-Runner |
Underwriter |
---|---|
IPO Book-runner is also known as Merchant Banker, Book-Running Lead Managers, Lead managers, Lead/Main Underwriter. |
An underwriter is also known as Co-manager, manager, broker, agent. |
A book-runner is responsible for assisting the issuer on the entire IPO process |
An underwriter comes into picture in case of under subscription. |
IPO Book-Runner is mandatory for all IPOs |
An underwriter is mandatory only in case of SME IPOs. |
Issuer pays fees to a merchant banker |
Underwriters charge a fee/underwriting commission for the services. |
Book running manager vs lead manager
The terms book-running manager and lead manager are used interchangeably. The roles and responsibilities of a book-running manager and a lead manager are the same. They are both responsible for conducting and assisting the issuer in the IPO process.
Merchant bankers are generally referred to as Book Running Lead Managers (BRLM) in the case of mainline IPOs and as Lead Managers in the case of SME IPOs.
If there are multiple lead managers, one of them is a book-running lead manager and the others are lead managers. If an IPO has two book-running lead managers, they are referred to as "joint book-running lead managers".
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