Intermediaries are essential players in the IPO landscape, facilitating the entire process from start to finish. These entities help companies transition to public ownership by coordinating efforts between the company and potential investors. The IPO prospectus provides detailed information on the roles and responsibilities of these intermediaries.
These intermediaries serve as a crucial link between the company and investors, ensuring that the IPO process runs smoothly and efficiently.
1. Issuer Companies
An issuer in an IPO is typically a private company looking to transition into a public entity by offering new shares or selling existing ones to the public for the first time. This process allows them to raise capital by tapping into public investments.
There are three main types of issuers that can launch an IPO:
- Large corporations (Mainboard)
- Small and medium-sized enterprises (SMEs)
- Startups
2. Role of Stock Exchanges
Stock exchanges serve as the platforms where investors trade securities like equity shares, bonds, and ETFs. Their primary function is to match buy and sell orders while providing a secure environment for transactions.
In India, stock exchanges are regulated by the Securities and Exchange Board of India (SEBI), which ensures adherence to rules and regulations. The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are the two leading exchanges in the country.
Investors need to open accounts with stock brokers, who act as intermediaries, to trade on these exchanges.
3. Understanding SEBI
The Securities and Exchange Board of India (SEBI) is the regulatory authority for India's capital markets. It was established to protect investors' interests and promote market development.
SEBI's Role in IPOs
Any company aiming to raise over Rs 50 lakhs through an IPO must submit a draft offering document to SEBI for approval. The offer should be filed within 12 months of SEBI's nod.
Some key points from SEBI on IPOs include:
- Merchant bankers must conduct due diligence and ensure compliance with SEBI's guidelines.
- SEBI does not guarantee the financial soundness of projects funded through IPOs.
- Investors should thoroughly examine offering documents before investing.
- SEBI does not influence the pricing of securities offered in IPOs.
4. Merchant Bankers as Lead Managers
Merchant bankers, also known as Lead Managers or Book-running Lead Managers (BRLM), are financial institutions registered with SEBI. They guide companies through the IPO process, from due diligence to post-listing activities.
Responsibilities of Merchant Bankers
Their roles can be divided into pre-issue and post-issue tasks:
Pre-Issue:
- Conducting due diligence
- Verifying company eligibility
- Structuring the offering
- Preparing and submitting the draft prospectus
- Roadshows and advertising
Post-Issue:
- Managing post-issue reports
- Assisting in share allotment
- Overseeing escrow accounts and refunds
- Promoting securities post-issue
5. Role of Bankers to an Issue
Appointed by the issuer company, these bankers manage funds collected during the IPO. They ensure proper fund allocation and transfer to various accounts, such as the Escrow, Allotment, or Refund accounts.
Their responsibilities include:
- Transferring IPO funds to designated accounts
- Managing surplus funds
- Providing regular bank statements
- Addressing investor complaints regarding refunds
6. Self-Certified Syndicate Banks (SCSB)
Self-Certified Syndicate Banks (SCSB) are SEBI-registered banks that facilitate the ASBA process for IPO applications. Investors can apply for IPOs online or offline through these banks.
Key responsibilities include:
- Accepting applications and blocking funds
- Coordinating with brokers for fund blocking verification
- Facilitating fund transfers to the issue's banker
- Ensuring smooth allotment and refund processes
7. Registrar to the Issue (RTI)
The IPO registrar is tasked with share allotment and maintaining shareholder records post-IPO.
Roles and Responsibilities
- Collecting application data from exchanges and banks
- Preparing lists of valid applications
- Overseeing share allotment
- Initiating refund procedures for non-allotments
Registrar as Transfer Agent
Once shares are listed, registrars act as transfer agents, maintaining shareholder records and processing changes like endorsements.
8. Role of IPO Underwriters
IPO underwriters assume the risk of purchasing unsold shares if an issue is under-subscribed. They enter into an agreement with the issuer, agreeing to buy remaining shares for an underwriting fee.
Responsibilities
- Ensuring compliance with underwriting agreements
- Managing share sales and purchases
- Assisting in share valuation
- Advising issuers on the IPO process
Underwriting Process
- Appointment of underwriters
- Agreement on underwriting terms
- Purchase of shares in case of under-subscription
9. Market Makers in IPOs
Market makers are stockbrokers who facilitate liquidity and price discovery by actively buying and selling stocks. They are crucial for SME IPOs, where liquidity can be an issue.
Role of Market Makers
- Providing two-way quotes to ensure liquidity
- Executing orders at quoted prices
- Maintaining sufficient inventory for allotment
- Serving in this role for at least three years
Market makers are introduced to the issuer by the lead manager and are compensated for the risks they undertake.
10. The Function of Depositories
Depositories hold shares in electronic form. In India, NSDL and CDSL are the two main depositories. They play a vital role in managing IPO shares.
Responsibilities include:
- Dematerializing physical shares
- Crediting shares to beneficiaries' accounts post-allotment
- Facilitating trading and settlement on listing
- Maintaining shareholder records for corporate actions
Depositories ensure the security and integrity of electronically held shares, eliminating the risk of theft.