Last Updated on March 14, 2024 by ethinos
If a privately owned company decides to become public through an Initial Public Offering (IPO), it needs to follow the guidelines set by the stock exchanges and regulatory bodies. To ensure legal and regulatory compliance, IPO issuers have to hire various intermediaries to help them carry out the complex IPO process.
Five major intermediaries are involved in operating separate works of every public offering. In this blog, you will learn about the intermediaries in new issue markets and their responsibilities.
Table of Content
Merchant Banker
A merchant banker is a financial institution involved with an IPO. One or more merchant banks are appointed as underwriters to carry out an IPO. Their functions can be categorised into:
1. Pre-Issue:
A merchant banker takes responsibility for appointing various agencies required for an IPO process. Additionally, it takes care of the requirements of SEBI and other regulatory bodies. It also completes formalities for stock exchange listings.
2. Post-Issue:
Post-IPO, it manages escrow accounts and determines the final issue price of shares. It also ensures the issues of allotment letters and refunds for unsuccessful allotments.
Registrars to the Issue
Registrars of an IPO prepare a BOA (Basis of Allotment) after the bidding day ends. They also work to separate valid and invalid applications. Overall, these intermediaries are responsible for managing IPO applications, sending refunds, allotment details, etc. They must electronically process all applications and finalise allotment within the given timelines.
Bankers to the Issue
Bankers are those financial institutions that maintain all the banking-related processes in a public issue. It includes–
- Accepting IPO applications and bidding amount
- Transfer of funds to a company or selling shareholders
- Refunds for rejected applications
- Dividend payments to eligible shareholders
Bankers play a very crucial role in an IPO to enable the movement of funds and clearing of funds by following the basis of allotment.
Underwriters
Underwriters take underwriting fees and agree to purchase shares if unsold after the IPO process. They purchase unsold shares from the issuer and sell them to their network.
However, they carry the risk of losses if they are not able to sell unsold shares above their buying price.
Additional Check : How IPO Offer Price Works
IPO Grading Agencies
SEBI instructed the grading agencies to provide more information to investors about an IPO. It helps to make an informed decision for all the potential investors.
Life-cycle of an IPO
This is the life cycle of an IPO process through which a privately owned company becomes a publicly traded entity–
- The company appoints the lead managers, syndicate members, registrars, etc.
- Lead managers of the IPO prepare a Draft Red Herring Prospectus (DRHP) and file the same with SEBI for approval.
- SEBI reviews the filed DRHP and if any changes are necessary, they will return it to the lead managers for correction. Otherwise, they will approve the company to launch its IPO.
- Now, the lead managers will submit it to stock exchanges and the Registrar of Companies (RoC) for approval.
- They decide on the opening and closing dates, and price bands and add the information in the offer document. Now, they file the RHP (Red Herring Prospectus) with SEBI and RoC.
- Then, the IPO opens and investors place their bids according to category.
- After receiving the total order from the potential investors, they submit it to the stock exchanges.
- Lead managers then decide a final issue price according to the demand. They update the final price in RHP and send it to stock exchanges and SEBI
- At this step, the IPO registrar receives funds and applications from syndicate members-> sorts out the eligible and correct applications-> finalises the share allotment process and prepares a Basis of Allotment (BoA). For rejected applications, they must ensure refunds and transfer shares to the demat accounts of eligible shareholders.
- Stock exchanges list the shares on the listing date and now they are available for trading in the secondary market.
Summing Up
IPO is not an easy process as there are several rules and regulations of regulatory bodies and stock exchanges that issuers have to follow. To help carry out the complex process, various intermediaries in the new issues market are available to provide guidance and direct help to complete all the necessary formalities.
Frequently Asked Questions:
IPO intermediaries are those institutions that help a private company to become public by issuing an IPO. They are involved in every step of the IPO process. Their roles are very important in the journey of public listing.
Intermediaries complete all the necessary formalities with the regulatory bodies and stock exchanges which help a company to launch its IPO. From DRHP preparation and filling to crediting of shares, these intermediaries are involved everywhere.
The issuing company pays for every service charge of IPO intermediaries. The fee may vary from company to company. Proceeds from the public issue may be used to pay these expenses.
Every intermediary of an IPO must be registered with SEBI and the company has to mention their address, name, and contact details in the offer document.
To select underwriters and other IPO intermediaries, issuing companies conduct meetings and interviews with leading companies. Sometimes, investment bankers reach out directly to companies gearing up for their public listing to provide their services.
