IPO Intermediaries

What Are IPO Intermediaries?

The Initial Public Offering process requires essential entities known as IPO intermediaries who support companies in performing IPO launches while securing effective stock exchange listings. The intermediaries function between issuing companies and investors through the IPO process by managing various operations and regulatory requirements for smooth administration.

Key IPO intermediaries include:

• Issuer Company
• Stock Exchanges
• SEBI (Market Regulator)
• Merchant Bankers (Lead Managers)
• Bankers to an Issue
• Self-Certified Syndicate Banks (SCSBs)
• Registrar to the Issue (RTI)
• IPO Underwriters
• Market Makers
• Depositoriesthe

1. Issuer Company

A private corporation that seeks to become accessible to public investors through an IPO operates as an Issuer Company. The company expands through capital raising because of its ability to obtain funds for debt repayment and other financial objectives.

Types of Issuer Companies:

• Mainboard Companies: Large, well-established firms.
• An SME (Small and Medium Enterprises) lists itself on SME trading platforms.
• Companies under the startup classification use IPOs to gain the necessary funding, which allows them to advance their business operations.

Zomato launched its IPO in 2021, which allowed the startup to acquire funding for its expansion purposes.

2. Stock Exchanges

Efficient stock markets offer their participants an environment where they can execute share trades. The two dominant stock exchanges operating in India include:

• BSE (Bombay Stock Exchange)
• NSE (National Stock Exchange)

Role of Stock Exchanges in an IPO:

• Facilitates share trading after listing.
• Share prices become discoverable through natural market operations.
• Zomato can acquire funding to amplify business growth by listing on a compliant trading platform.

The Zomato IPO received dual listing at the BSE and NSE stock exchanges.

3. SEBI: The Market Regulator

The Securities and Exchange Board of India (SEBI), as the market regulatory authority, controls offerings through initial public offerings and operates stock exchanges for investor protection.

SEBI’s Role in IPOs:

• The approving authority examines both the DRHP and RHP documents for the IPO prospectus.
• The mechanism establishes honest practices among both the issuers and the intermediaries.
• Mandates the disclosure of financial information to investors.

SEBI demands approval from any company that plans to raise more than INR 50 lakhs through an Initial Public Offering IPO.

4. Merchant Banker (Lead Manager)

SEBI approves financial institutions as merchant bankers, also known as Lead Managers, for their registration process. The entire IPO process, encompassing preparation and listing, receives assistance from these financial institutions.

Responsibilities:

• A thorough investigation must be performed to validate the validity of the provided company information.
• Companies need to submit both RHP and DRHP documents as IPO application and a prospectus to SEBI.
• The IPO market will be promoted through ads and roadshows by the company.
• Manage post-issue compliance and refunds.

The LIC IPO received its lead management services from ICICI Securities and Kotak Mahindra Capital.

5. Bankers to an Issue

The designated banks orchestrate both the fund distribution and transfer operations of IPOs. The funds remain in escrow accounts during the entire allocation duration before the process reaches completion.

Key Responsibilities:

• Collect IPO application funds.
• The company issuer receives allocated funds through bank transactions.
• Issue refunds to unsuccessful applicants.

Example: HDFC Bank and SBI act as bankers to several IPOs.

6. Self-Certified Syndicate Banks (SCSBs)

SCSBs receive their authorization from SEBI to implement ASBA (Application Supported by Blocked Amount) for IPO application processing.

Functions of SCSBs:

• The bank system prevents investors from accessing IPO application funds maintained in their bank accounts.
• The entity will communicate its fund transfer requirements to both brokers and depositories.
• The process for stock distribution and money reimbursements must operate without interruptions.

The banking institutions Axis Bank and ICICI Bank represent two leading Self-Certified Syndicate Banks.

7. Registrar to the Issue (RTI)

RTIs undertake the responsibility of IPO application administration and they grant stock allocations in addition to maintaining investor files post-issuance.

Responsibilities:

• The IPO application processing requires SCSBs to authenticate investor information.
• The method of deciding how many shares will be granted to investors must be established.
• The organization executes both payment returns together with distributed stock ownership credits.

Major IPO registration services are provided by KFin Technologies and Link Intime India.

8. IPO Underwriter

The underwriting process ensures complete subscription of IPOs by making financial commitments. Under these circumstances, they buy the available shares that demand did not absorb.

Key Responsibilities:

• Judgment about risks associated with the IPO needs to be performed through analysis.
• You need to market the IPO to achieve a sufficient demand level.
• Purchase unsold shares if required.

The law requires underwriting for SME IPOs, but Mainboard IPOs have underwriting as an optional requirement.

9. Market Maker

The function of market makers in SME IPOs involves offering continuous share trading through both purchase and sale transactions.

Functions of a Market Maker:

• Prevents extreme price fluctuations.
• Ensures share availability for trading.
• The presence of market makers increases belief among investors regarding small business initial public offerings.

The NSE Emerge and BSE SME platform depends heavily on market makers to fulfill their listing responsibilities.

10. Depositories

The IPO shares of investors are stored in electronic format through depositories. India operates two depository institutions which are known as NSDL and CDSL.

• NSDL (National Securities Depository Limited)
• CDSL (Central Depository Services Limited)

Role of Depositories:

• Maintain ownership records.
• The system supports fast and convenient movements of shares along with trading operations.
• Electronic conversion of physical shares is enabled by dematerialization procedures.

The process of IPO share allocation leads to their electronic storage through NSDL or CDSL within an investor's Demat Account.

IPO Process & Role of Intermediaries at Each Stage

Stage 1: Pre-IPO Planning & Documentation

A company selects an initial public offering to acquire capital from shareholders.

Engagement of Lead Manager & Other Intermediaries: Appointing underwriters, registrars, and legal advisors.

The Lead Manager writes and presents the Draft Red Herring Prospectus to SEBI.

SEBI evaluates and gives final approval to the IPO during the regulatory assessment.

Stage 2: IPO Subscription & Allotment

Investors participate in ASBA-supported banks to make their application for the subscription process.

The registrar performs two functions: accepting applications and carrying out the allotment process.

Stock Exchange Role: Ensures a transparent bidding process in the book-building method.

Depositories accepted allotted shares into investors’ direct electronic money accounts.

Stage 3: Listing & Post-IPO Compliance

The company lists its stock for trading on NSE/BSE stock exchanges.

In case the shares from an IPO cannot be subscribed by investors underwriters step in to purchase them.

After listing public relations agencies handle investor relation duties for shareholders.

Frequently Asked Questions (FAQs)

Q1: Who is the most crucial intermediary in an IPO?

During an IPO process, the Lead Manager holds the position as the most essential intermediary.

During an IPO the Lead Manager stands as the most essential intermediary because they guide the complete offering process.

Q2: How do registrars help in IPO allotment?

The role of registrars in IPO allotment includes application processing and performing equity distribution based on SEBI standards together with handling refund procedures.

Registries receive applications from investors while they use SEBI standards for equitable share distribution and administer reimbursement procedures.

Q3: What is the role of depositories in an IPO?

The fundamental purpose of depositories in IPOs involves electronic share storage and post-listing transfer services.

Shares owned by investors are stored as electronic records by both the NSDL and CDSL depositories which enable transfer transactions after market listing.

Q4: How does SEBI regulate IPOs?

Through financial and IPO documentation review SEBI preserves investor safety and establishes clear pricing standards while maintaining clear business operations.

Q5: What happens if an IPO is undersubscribed?

In the case of an IPO that receives insufficient subscriber interest, the remaining shares become the property of the Underwriters or the IPO may need to be canceled.

The allotted securities will go to underwriters or the IPO might be canceled in case subscription goals are not reached.