It is common for companies to raise money from Initial Public Offerings (IPOs). In 2023, there were a total of 46 IPOs launched in India through which business houses raised a massive cumulative amount of Rs 41,096 crore. To ensure that this fundraising goes smoothly and the company meets its capital targets, certain specialised professionals, known as syndicate members, play a key role.
Let us understand syndicate members meaning in detail and see how they help business organisations.
Who is a syndicate member in IPO?
A syndicate member in an IPO can be an investment banker, commercial bank, or a financial institution. They help a company go public by selling its shares during an IPO. Let us understand some of their primary duties:
- A syndicate member acts as an intermediary between the:
- Issuing company and
- Investors
- They collect bids from investors.
- They provide the Red Herring Prospectus along with the IPO application form.
- They are responsible for underwriting the IPO.
- They distribute the newly issued stocks or bonds
- They conduct due diligence and set IPO pricing.
- They ensure regulatory compliance.
Who can be a syndicate member?
To be a syndicate member in India, the individuals or entities should be registered with the Securities and Exchange Board of India (SEBI). Alternatively, they can also be registered as brokers with:
- The Bombay Stock Exchange (BSE) or
- The National Stock Exchange (NSE)
Most companies select syndicate members based on their:
- Expertise
- Experience, and
- Track record in the industry
Usually, it is expected from the syndicate members that they should have:
- A strong understanding of the market
- An ability to distribute and sell the shares
- Expertise in handling IPOs
- Good reputation in the financial market
How do syndicate members act as underwriters during an IPO?
In India, as per the SEBI guidelines, an issuing company is required to secure at least 90% of the issued amount. Failure to do so would require the issuing company to refund the entire application money within 15 days from the closure of the issue.
Usually, to avoid such situations, syndicate members act as underwriters during an IPO. They commit to purchasing the minimum subscription shares from the issuing company at a predetermined price. In other words, syndicate members make up for the shortfall and ensure that the issuing company complies with the SEBI mandate.
Let us understand better using a hypothetical example.
The scenario
- ABC Ltd. is planning to go public through an Initial Public Offering.
- The company plans to issue 1,00,00,000 shares at a price of Rs. 100 per share, aiming to raise Rs. 100 crore in total.
The law
- As per SEBI guidelines, ABC Ltd. is required to secure at least 90% of the issued amount.
- This means they need to receive applications for shares worth Rs. 90 crore.
- However, if they fail to achieve this subscription level, they must refund the entire application money to investors within 15 days from the closure of the issue.
The underwriting
- To eliminate the risk of falling short of the minimum subscription requirement, ABC Ltd. engages syndicate members.
- They now act as underwriters for the IPO, along with performing their other duties.
- The hired syndicate members agree to underwrite 50% of the IPO amount at Rs. 100 per share.
- They commit to purchasing shares worth Rs. 50 crore from ABC Ltd.
The effect
- ABC Ltd. received a lacklustre response from the public with only shares worth Rs. 60 crore getting subscribed.
- The syndicate members purchased the minimum unsubscribed portion of Rs. 30 crore (Rs. 90 crore - Rs. 60 crore).
- They ensured that:
- ABC Ltd. complies with SEBI guidelines and
- Is not required to refund the application money to investors
- After purchasing the minimum unsubscribe portion, the syndicate members sell these shares to the public.
What is syndication risk?
As discussed earlier, syndicate members act as underwriters. This leads to the risk of syndication, which represents a situation when they are unable to fully distribute the offered securities to investors. In most cases, this risk arises when there is insufficient demand for the securities at the agreed-upon price.
Let us continue from the above example, in which syndicate members hired by ABC Ltd. assumed the minimum unsubscribed portion of Rs. 30 crores at Rs. 100 per share.
- Say post-IPO-launch, the investors develop a negative sentiment towards ABC Ltd.
- This causes the share price of ABC Ltd. to be caught in lower circuits.
- The syndicate members are unable to offload their holding due to the non-availability of buyers.
In such a situation, if the loss is too much for the syndicate members, they can become insolvent.
What are the different types of syndicates?
While issuing an IPO, syndicates take on various forms. Some of the primary ones include:
- Lead managers
- Book running lead managers, and
- Co-managers
Let us understand them in detail:
Lead manager
- The lead manager is the primary entity responsible for managing the entire underwriting process of a securities offering.
- Some primary responsibilities:
- Coordinating with the issuing company to:
- Give a definite structure to the IPO
- Determine IPO pricing
- Conducting due diligence on the issuing company
- Ensuring regulatory compliance
- Leading the marketing efforts to:
- Attract investors, and
- Generate demand for the offering
- Setting the offering price
- Managing the allocation of shares or bonds to investors
- Coordinating with the issuing company to:
Book running lead manager (BRLM)
- This type of syndicate is responsible for managing the book-building process in a securities offering.
- Some primary responsibilities include:
- Collecting investor bids at various price levels during the book-building process
- Analysing the demand for the securities
- Determining the final offering price based on:
- Investor feedback, and
- Market conditions
- Maintaining the order book
- Ensuring transparency in the allocation of securities to investors
Co-manager
- In this syndicate, a co-manager is a secondary underwriter.
- Some primary duties and functions:
- Assisting the lead manager in various aspects of the underwriting process, such as:
- Due diligence
- Marketing, and
- Distribution
- Assisting the lead manager in various aspects of the underwriting process, such as:
- Participating in the syndicate meetings.
- Offering insights and expertise to the IPO.
Conclusion
It is common for companies willing to raise capital through IPOs to hire syndicate members. They are investment firms and financial institutions that facilitate the IPO process by acting as intermediaries between the issuing company and investors. Their primary duties include collecting bids, underwriting the IPO, distributing shares, conducting due diligence, setting IPO pricing, and ensuring regulatory compliance.
Do you wish to expand your IPO knowledge? Learn about IPO allotment status and cut-off price in IPO.
