Intermediaries (Players) in the New Issue Market

The new issue market / activity was regulated by the Controller of Capital Issues (CCI) under the provisions of the Capital Issues (Control) Act, 1947 and the exemption orders and rules made under it. With the repeal of the Act and the consequent abolition of the office of the CCI in 1992, the protection of the interest of the investors in securities market and promotion of the development and regulation of the market/ activity became the responsibility of the SEBI.

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).

Underwriters

Underwriters: Another important intermediary in the new issue/ primary market is the underwriters to issue of capital who agree to take up securities which are not fully subscribed.

They make a commitment to get the issue subscribed either by others or by themselves. Though underwriting is not mandatory after April 1995, its organization is an important element of primary market. Underwriters are appointed by the issuing companies in consultation with the lead managers / merchant bankers to the issues.

Methods of Underwriting

An underwriting agreement may take any of the following forms:

• 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.

• Outright Purchase:

In this method the underwriters purchases the entire issues at an agreed price and sell them to investors.

• 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.

• 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.

• 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.

• 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.

• Sub-Underwriting:

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.

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.

Brokers to the Issue

Brokers are persons mainly concerned with the procurement of subscription to the issue from the prospective investors. The appointment of brokers is not compulsory and the companies are free to appoint any number of brokers. The managers to the issue and the official brokers organize the preliminary distribution of securities and procure direct subscription from as large or as wide a circle of investors as possible. A copy of the consent letter from all the brokers to the issue, should be filed with the prospectus to the ROC. The brokerage applicable to all types of public issue of industrial securities is fixed at 1.5%, whether the issue is underwritten or not. The listed companies are allowed to pay a brokerage on private placement of capital at a maximum rate of 0.5%. Brokerage is not allowed in respect of promoters’ quota including the amounts taken up by the directors, their friends and employees, and in respect of the rights issues taken by or renounced by the existing shareholders. Brokerage is not payable when the applications are made by the institutions/ bankers against their underwriting commitments or on the amounts devolving on them as underwriters consequent to the under subscription of the issues.

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.

Bankers to an Issue

The bankers to an issue are engaged in activities such as acceptance of applications along with application money from the investor in respect of capital and refund of application money.

Registration: To carry on activity as a banker to issue, a person must obtain a certificate of registration from the SEBI. The applicant should be a scheduled bank. Every banker to an issue had to pay to the SEBI an annual free for Rs. 5 lakh and renewal fee or Rs. 2.5 lakh every three years from the fourth year from the date of initial registration. Non-payment of the prescribed fee may lead to the suspension of the registration certificate.

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.