A merchant banker is a financial institution registered with the Securities and Exchange Board of India (SEBI) that assists companies in managing their Initial Public Offerings (IPOs). A company cannot launch an IPO without appointing a SEBI-registered merchant banker, as it is a mandatory legal requirement.
In this blog post, we shall discuss with our readers the major benefits of appointing a merchant banker for an IPO. If you’re planning to launch an IPO for your company, we recommend reading this post till the end.
A merchant banker is a financial intermediary that acts as a link between the issuing company and investors in the securities market. Such organizations help businesses raise funds from the public by assisting them throughout Initial Public Offering (IPO) process. They first evaluate the company's financial health, help restructure its capital and then advise whether a Mainboard or SME listing would be more suitable for the company.
The issuing company is required to file a Draft Red Herring Prospectus (DRHP) and a Red Herring Prospectus (RHP) as part of the IPO process. However, the company does not handle all these regulatory formalities on its own. Merchant bankers assist in preparing and filing these required offer documents with SEBI and concerned stock exchange.
The merchant bankers also carefully analyze market conditions, earnings and peer benchmarks to determine a fair issue price and price band for the IPO. In addition, they help with underwriting the issue where required, manage the share allotment process and oversee refunds. In India, the merchant bankers are primarily governed by the SEBI (Merchant Bankers) Regulations, 1992, as amended from time to time, along with other SEBI regulations and guidelines.
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Now, let’s check out the advantages of hiring a merchant banker to handle the IPO process:-
Hiring a SEBI registered merchant banker in India is a mandatory legal requirement for a company wanting to get publicly listed through an IPO. Therefore, the biggest advantage of hiring a merchant banker is that it helps the company comply with relevant laws and regulations.
Merchant bankers provide assistance to companies in preparing offer documents, including the DRHP, RHP and final prospectus. All of these documents are extremely crucial for the IPO process. The IPO process involves filing these required documents with SEBI and the concerned stock exchange.
While preparing these documents, merchant bankers comply with latest SEBI regulations, stock exchange requirements and provisions of Companies Act, 2013. This helps the issuing company avoid errors that could lead to regulatory objections and costly delays.
A merchant banker acting as a book running lead manager helps the issuing company determine its IPO issue size and price band. This process is not as simple as you may think it is. It requires professional expertise.
The merchant bankers have to analyze peer valuations, the company's financial performance, growth prospects and market demand to help the company determine an appropriate issue size and price band. This benefit shows how important a merchant banker truly is for an IPO.
Underwriting is yet another major benefit of appointing a merchant banker for initial public offering. Underwriting means that underwriters agree to buy shares that remain unsubscribed by investors in exchange for a commission or pre-determined fee. For SME IPOs, 100% underwriting is mandatory under Regulation 260 of SEBI ICDR Regulations, 2018. This requirement set forth by the market regulator ensures entire public issue is backed by underwriting commitments.
Merchant banker for SME IPO is required to underwrite at least 15% of issue size on their own account. The remaining portion, however, can be covered by other underwriters. This support helps issuing company meet SEBI underwriting requirements as well as manage undersubscription risk.
Merchant bankers have a good network of investors, including qualified institutional buyers, mutual funds, insurance companies, foreign institutional investors and high net worth individuals. Through investor roadshows and brand marketing, they help the company create awareness about its IPO and attract potential investors for IPO subscription.
They arrange meetings with investors, research analysts and financial media to explain the company's business, growth plans and future prospects. This helps the company to reach more and more investors, build trust in its business and generate interest in its IPO.
The IPO journey is not easy at all. It is quite complicated, and many companies actually fail to debut their IPOs due to legal and regulatory hurdles. However, appointing a well-reputed merchant banker makes the process much smoother and compliant. The merchant bankers are well aware of the requirements for preparing DRHP, RHP and final prospectus, filing the required documents with SEBI and complying with relevant rules and regulations. They also help the issuing company determine the issue size and price band, handle IPO marketing and meet underwriting requirements as discussed in this blog post.
Want to hire merchant banker for IPO but don't know how to go about it or which one is ideal for your company? Fret not! Just book a free consultation with Registrationwala, one of the leading IPO advisory firms in India, and avail Book Running Lead Manager (BRLM) services..
Q1. Can a company planning to launch an IPO choose not to appoint a merchant banker?
A. No. A company planning to launch an IPO must appoint a SEBI-registered merchant banker, as it is a mandatory legal requirement.
Q2. How does a merchant banker help an issuing company determine the IPO issue size and price band?
A. To help an issuing company determine a suitable IPO issue size and price band, a merchant banker analyzes company's financial performance, growth prospects, peer valuations and market demands/trends.
Q3. Which regulations govern merchant bankers in India?
A. Merchant bankers in India are primarily governed by SEBI (Merchant Bankers) Regulations, 1992, as amended from time to time. Additionally, they are also governed by other applicable regulations and guidelines set forth by market regulator.
Q4. Are merchant bankers required for both Mainboard and SME IPOs?
A. Yes. Companies planning to launch either a Mainboard IPO or an SME IPO must appoint a SEBI-registered merchant banker to manage the issue and comply with all the regulatory requirements like filing DRHP and RHP with SEBI and stock exchanges, underwriting compliance, post-listing compliance requirements, etc.
Q5. What is the merchant banking fees for IPO process?
A. The fee charged by a merchant banker for assisting in IPO process is usually a percentage of total funds raised or total issue size, which generally ranges from 1% to 5%. Alternatively, they may charge a fixed management fee for their services. For better clarity regarding fees, we highly recommend getting in touch with our IPO consultants at Registrationwala.
Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, finance and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.
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