The important intermediaries/players in the new issue market are: 1. Merchant Bankers (Managers to the Issue) 2. Underwriters 3. Registrars to the Issue 4. Brokers to the Issue 5. Banker to the Issue 6. Syndicate Members.
1. Merchant Bankers (Managers to the Issue):
SEBI regulations 1992 prescribes that all public issues should be managed by at least one merchant banker functioning as Lead manager or Managers to the Issue.
“Merchant banker means any person/institution who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory services in relation to such issue management.” [Sec 2(cb) SEBI (Merchant Bankers) (Third Amendment) Regulations, 2006]
Depending on the size of the issue there can be more than one manager to the issue. If the size exceeds Rs. 400 crores there can be five or more managers as agreed by SEBI. These Managers to the issue assist the promoters in designing the capital structure, drafting the prospectus and application forms, listing of shares, appointment of registrars and other operators in the new issue, arrangement of long term loans- marketing of public issues etc. The lead manager prepares Draft Red Herring Prospectus (RHP) and is responsible for any irregularities in the same. The company should enter into a memorandum of understanding with the managers to the issue in the form prescribed by SEBI.
The lead merchant bankers appointed by the Issuer Company are referred to as the Book Running Lead Managers (BRLM) or Book Runners (If the issue is through book building process).
DSP Merril Lynch Ltd., ICICI Securities, SBI Capital Markets Ltd., JP Morgan India Pvt. Ltd., ABN AMRO Securities (India) Pvt. Ltd. Etc. are few names of merchant bankers acted as managers to issue in recent public issues.
2. Underwriters to the Issue:
Underwriters are financial institutions who make a firm commitment that they will take up the shares up to a certain amount if the public does not subscribe to it. This is an agreement with one or more institutions and a guarantee of the marketability of shares. Under writing is mandatory for the Public Issue. Underwriters are appointed by the company in consultation with the managers to the issue. Financial institutions, bankers, members of stock exchanges, investment companies, trusts etc. can act as under writers.
Methods of Underwriting
An underwriting agreement may take any of the following forms:
i. Standing behind the Issue:
Under this method the underwriter guarantees the sale of a specified number of shares within a specified period. If the public do not subscribe to the specified amount of issue, the underwriter will buy the balance. It is also called full underwriting.
ii. Outright Purchase:
In this method the underwriters purchases the entire issues at an agreed price and sell them to investors.
iii. Consortium Method:
In mega issues several underwriters join together to underwrite. They form a consortium/syndicate for this purpose. It is also called syndicate underwriting.
iv. Partial Underwriting:
The underwriter undertakes the guarantee for only a part of the issue offered to the public and his liability is limited to the extent of unsubscribed portion of the issue underwritten by him under this method.
v. Joint Underwriting:
The issuing company may enter into underwriting agreement with more than one underwriter in case of large issues. Each under-writer undertakes the guarantee for the issue of a certain portion of the whole issue offered to the public and shares the risk.
vi. Firm Underwriting:
Under this method, the underwriter undertakes to buy or subscribe a certain number of shares irrespective of the subscription from the public. Underwriter will be liable for shares underwritten as well as that part of issue unsubscribed by the public.
Under this method, the underwriter enters into agreement with some other underwriters to undertake guarantee for the issue of whole or part of the issue under-written by him.
Underwriters play a significant role in new issues market.
Underwriting has the following advantages:
(i) Issuing company is assured of procuring the required funds from issue through underwriting.
(ii) Under writers supply expert advice and valuable information with regard to capital market conditions, general response of the investors etc. to the issuing company.
(iii) Underwriting helps promoters to retain control over the management of the company, because they distribute the issue over a large number of investors scattered in different part of the country.
(iv) Prestige of the underwriting agencies increases the goodwill of the issuing company.
(v) Prospective investors are also benefited through the service of underwriters as they provide essential information about the issuing companies and encourage them to save money is corporate securities.
Underwriters charge a commission for their service which is known as underwriting commission. The underwriters must be registered with SEBI. There are three SEBI registered underwriters now. E.g., Citicorp Capital Markets Ltd., State Bank of India etc.
3. Brokers to the Issue:
Brokers are persons authorized to market the issues. Companies can engage any number of brokers to market the new issue. The brokers may engage sub-brokers and they send their own circulars, publicity materials and applications to the clients and follow up the work for canvassing the subscription. Brokers to the issue are not compulsory for public issues, but their expertise and contacts with investors could be used for marketing the issue.
Remuneration to the broker and terms and conditions of brokerage is fixed by SEBI. There are 10,000 brokers and more than 70,000 sub-brokers registered with SEBI. Geojith BNP Paribas Financial Services Ltd., JRG Securities Ltd., Karvy Stock Broking Ltd., UTI Securities Ltd., UAE Exchange & Finance Ltd., Sharekhan Ltd. etc. are names of few well known brokers.
4. Registrars to the Issue (Registrar and Share Transfer (R&T) Agents):
R&T agent plays a significant role in a public issue along with the lead managers. Registrars are persons appointed in consultation with lead managers to assist the issue management functions. Their work relates to pre-issue management, management during the currency of issue, pre- allotment Work, allotment work and post allotment work.
It is their duty to collect the application forms from bankers to the issue, process them for allotment and issue certificate of allotment.
Major functions of registrars can be listed as follows:
(i) Design and draft the format of application form for the merchant banker or lead manager.
(ii) Collect application forms from banks.
(iii) Scrutinize application forms.
(iv) Finalize the allotment as per the basis approved by the stock exchange.
(v) Ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done
(vi) Print refund orders and letters of allotment.
(vii) Submit all statements to the company for their final approval.
(viii) Help the company in getting the shares listed.
The Lead manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed. 66 SEBI registered R&T agents are now functioning. E.g., Karvy Computershare Pvt. Ltd., Ankit Consultancy Pvt. Ltd., CANBANK Computer Services Ltd., Deutsche Investor Services Pvt. Ltd. etc.
5. Bankers to the Issue:
Bankers to the issue collect the application forms and the money in cash, cheque or ASBA. Depending on the size of the issue there may be many collection centers and many bankers. They are appointed in consultation with lead manager. Infrastructure facilities available, manpower, past experience, location of branches, efficiency and cost effectiveness etc. are parameters for selection of bankers to the issue.
The Lead Merchant Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection centers. The Lead manager also ensures follow-up with bankers to the issue to get quick estimates of collection and advising the issuer about closure of the issue, based on the actual figures.
Application Supported By Blocked Amount (ASBA):
This is a new mode of payment for applying for a public issue. ASBA is an application containing an authorization to block the application money in the bank account, for subscribing to an issue. If an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized.
Under ASBA facility, investors can apply in any public issues by using their bank account. Investor submits the ASBA form to their banking branch by giving an instruction to block the amount in their account. Self-Certified Syndicate Bank (SCSB) is a Banker to an Issue registered under SEBI (Bankers to an Issue) Regulations, 1994 which offers the service of ASBA.
The banker to the issue will transfer all the applications received to the registrar to the issue on the closure of issue subscription. They also help the issuer in marketing the issue by distributing the application forms and publication materials.
As of now there are 55 banks registered with SEBI as Honkers to an Issue under the SEBI (Bankers to an Issue) Regulations, 1994. All these banks are eligible to act as Self Certified Syndicate Bank (SCSB) for the purpose of ASBA.
6. Syndicate Members:
The Book Running Lead Managers to the issue appoint the Syndicate Members, who enter the bids of investors in the book building system. Syndicate Members are commercial or investment banks registered with SEBI who also carry on the activity of underwriting in IPO.
They work as intermediaries for Issuer Company and the buyers of the IPO stocks. Investors submit their bids for IPO shares through Syndicate Members appointed by the Issuer Company. They are also known as ‘the Members of the Syndicate’. The Members of the Syndicate circulate copies of the Red Herring Prospectus along with the bid cum application form to potential investors. After receiving the bid for IPO Shares from an investor, Syndicate Member enters bidding detail into the electronic bidding system and generates a Transaction Registration Slip (TRS) for each price and demand option and gives the same to the bidder.