A Merchant Banker is mandatory for an SME IPO in India. As per SEBI and SME exchange regulations, every SME IPO must appoint a SEBI-registered Merchant Banker (Category I) to manage the issue.
SME IPOs involve smaller companies, limited public information and higher risk compared to Mainboard IPOs. To protect investors, regulators make the Merchant Banker responsible for quality control and compliance.
Here's a more detailed explanation:
- Underwriting:
In SME IPOs, the Merchant Banker must underwrite at least 15% of the issue. If the IPO is not fully subscribed, the Merchant Banker must subscribe to the shortfall. This ensures minimum subscription and commitment from the Lead Manager and acts as a protection for retail investors
- Market Making:
Market making is mandatory for SME IPOs, and the merchant banker is responsible for creating a market for the shares after they are listed. This helps ensure that investors can easily buy and sell the shares.
- Pre-IPO Preparations:
Merchant bankers help SMEs prepare for the IPO by advising on capital restructuring, valuation, and other necessary steps.
- Document Preparation:
A merchant banker is responsible for drafting and finalising the IPO documents, such as the red herring prospectus (RHP) and other necessary agreements.
- Issue Management:
Merchant bankers manage the entire IPO process from obtaining regulatory approval to opening and closing the IPO.
- Post-IPO Support:
Merchant bankers continue to support the company post listing by guiding market-making and other post-IPO activities.
The merchant banker acts as a key intermediary between SME and investors, guiding them through the complex process of raising capital through an IPO.
