IPO Intermediaries

IPO intermediaries are primary institutions or individuals who assist a firm in successfully launching and listing its Initial Public Offering (IPO). These intermediaries perform different roles during the process, ensuring that everything goes as planned.

The primary players in most cases would be merchant bankers, registrars, underwriters, bankers to the issue, and market makers.

IPO Intermediaries: A Central Function in the IPO Process

IPO intermediaries are individuals and institutions that assist a company in launching and finalizing its Initial Public Offering (IPO), ultimately culminating in a successful listing on the stock exchange.

They play the role of a very important link between the company coming to the public markets and the possible investors. They are responsible for preparing documents, dealing with legal and regulatory matters, and maintaining coordination between all concerned parties.

The IPO prospectus, an in-depth document released by the company, delineates the role and responsibility of every intermediary within the process.

The issuer is the company going out for IPO—usually a private company planning to go public by issuing shares to the public for the very first time. The reason behind issuing shares is typically to mobilize capital to expand, to pay off debts, or to achieve other strategic objectives.

Categories of Issuer Companies

A stock exchange offers the marketplace for trading listed securities like shares, bonds, and ETFs. It is a place where buyers and sellers are brought together to effect trades. Stock exchanges ensure that trades are transparent, secure, and in accordance with the law.

In India, the exchanges are overseen by the Securities and Exchange Board of India (SEBI). Two of the biggest known exchanges are the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange).

Investors have to enter into the market by opening an account with a registered stock broker, who serves as an intermediary between them and the exchange.

The Securities and Exchange Board of India (SEBI) is the primary regulator of India's securities market. Established by the Government of India, SEBI's main role is to protect investor interests and ensure fair and transparent market practices.

SEBI's Role in an IPO

• Companies planning to raise over ₹50 lakhs through an IPO must submit a draft offer document to SEBI for review and approval
• This approval is valid for 12 months, during which the company must proceed with the IPO
• Merchant Bankers are tasked with performing due diligence and ensuring all information disclosed in the offer document complies with SEBI's regulations
• SEBI does not guarantee the financial health of any company issuing an IPO
• The regulator also does not endorse or recommend any investment opportunity
• Investors are requested to carefully read the offer document and evaluate risks before investing
• Pricing of issuer companies is in their discretion without interference by regulatory bodies

Meaning of Due Diligence in an IPO

IPO due diligence involves a thorough probing and validation of a company's business, finance, operations, and legal status. The exercise entails coordination among the issuer and all the intermediary parties involved so that transparency and trust for would-be investors can be guaranteed.

Merchant bankers or Lead Managers or Book Running Lead Managers (BRLM) are SEBI-registered financial institutions that have a pivotal role in taking a company through the IPO process. Their role ranges from the planning stage to the last listing and even post-listing.

An IPO can have one or more lead managers, depending on its size and complexity.

Key Responsibilities of Merchant Bankers

Their activities are classified into Pre-Issue and Post-Issue phases in broad terms:

These are SEBI-regulated banks hired by the issuer to handle IPO-related funds. Their responsibility is to facilitate the flow of money between various accounts such as Escrow, Allotment, and Refund accounts.

Responsibilities of Bankers to the Issue:

• Transfer funds received during IPO to the Escrow Account
• Transfer Escrow funds to the Allotment Account or the Refund Account as instructed by the Lead Manager
• Administer refunds to unallocated shares
• Make available bank statements and account information to the Registrar, Lead Manager, and the Issuer
• Cancel all accounts upon finalization of transactions and balancing of accounts
• Respond to investor grievances regarding refunds

SCSBs are SEBI-regulated banks that have been permitted to provide ASBA (Application Supported by Blocked Amount) services. ASBA has turned into an obligatory facility for applying for an IPO in India. Investors should hold a bank account with an SCSB in order to apply through this facility.

Functions of SCSBs:

• Receive IPO applications from investors (online through net banking or offline through branches)
• Block the application value in the bank account of the investor
• Co-ordinate with brokers to establish fund blocking to place orders
• Enable transfer of funds to the issuer upon allotment of shares
• Coordinate with depositories and other organizations for smooth allotment and refund processing

IPO Registrar is a leading institution that undertakes the administrative aspect of IPOs, specifically share allotment and post-listing shareholder records. They are typically authorized by the issuer company and perform a central role in ensuring correct and transparent share allotment.

Registrar's Duties:

• Gather application details from banks and stock exchanges
• Coordinate with depositories to compile a list of valid applications for IPO
• Fix the Basis of Allotment in consultation with the stock exchange
• Process and finalize allotment of shares
• Release allotment letters and begin refunding non-allottees

Registrar as a Share Transfer Agent (RTA):

After the IPO and listing of the company, the registrar remains a Share Transfer Agent. They keep precise shareholder records, such as names of owners and dividend entitlement. Their functions include:

• Renovation of shareholder names and change in ownership
• Securities transfer recording and support
• Providing assurance for data integrity and prompt reporting to shareholders

An IPO underwriter is significant in guaranteeing the success of an IPO, particularly in situations where there's a possibility of under-subscription. In effect, the underwriter commits to buying any shares that are left unsold, providing financial assurance to the issuer.

How IPO Underwriting Works:

The underwriter and issuer sign a written underwriting contract, in which the underwriter agrees to purchase a predetermined amount of the issue that is left unsubscribed. As payment for assuming this risk, they receive an underwriting commission.

Key Responsibilities:

• Comply with provisions of the underwriting agreement
• Guarantee the number of shares agreed for sale
• Purchase any outstanding unsold shares following the closing of the IPO
• Carry out IPO marketing operations such as roadshows and advertisements
• Help estimate the value of the shares — determining whether or not they are underpriced or overpriced
• Advise the issuer strategically during the IPO process

Steps involved in the Underwriting Process:

1. An underwriter is appointed by the issuer
2. The contract is executed for the percentage of underwriting and fees
3. Under-subscription will be settled by the underwriter by buying the unsold shares at the pre-negotiated price

A Market Maker is a registered stockbroker who posts continuous buy and sell quotations for certain stocks, facilitating liquidity — particularly in lower volume traded stocks.

Why Market Makers Are Important:

They dampen volatility and allow investors to enter and exit positions easily. In SME IPOs, where volumes tend to be low, market makers are crucial and their presence is required. For Mainboard IPOs, it's optional.

Responsibilities of a Market Maker:

• Provide buy/sell quotations (2-way quotations) during the trading day
• Keep their quotes open at least 75% of market time
• Trade at quoted prices
• Operate from the listing date and onwards as per exchange regulations
• Are not permitted to purchase shares from the promoters during the period of market making
• Should have sufficient inventory to meet their commitments
• File their information in the Draft Red Herring Prospectus (DRHP)

Key Points to Remember

• Market makers have to operate for a minimum of 3 years after listing
• One IPO can have a maximum of five market makers
• They may exit with a notice period of one month to the exchange
• They're rewarded by the issuing company for the inventory risks

Depositories are organizations that keep investors' securities — such as shares — in electronic (dematerialized) form. This removes the risks and inconvenience of physical share certificates.

There are two depositories in India:

Depository Functions in an IPO:

• Dematerialize physical shares (if any) prior to the IPO
• Credit allotted IPO shares to investors' demat accounts after allotment is completed
• Enable trading and settlement of shares after listing
• Maintain correct shareholder records for future company action (dividends, bonus issues, etc.)
• Secure safe and accurate electronic shareholdings
• Each issuer enters into a tripartite agreement with each depository and registrar to facilitate these responsibilities effectively