by Pre and post issue management are essential components of the process involved in raising funds from the capital markets, particularly through public offerings such as Initial Public Offerings (IPOs) or Follow-on Public Offerings (FPOs). Merchant banks play a crucial role in managing these phases to ensure the smooth execution of the offering, protecting the interests of both the issuer and the investors.
Pre-Issue Management:
Pre-issue management is the stage before the public issue of securities, and it involves several steps and activities aimed at preparing the company for the issue and ensuring its success. The responsibilities of the merchant banker in this phase:
- Advisory and Strategic Planning:
Before the actual issue, the merchant banker works closely with the company to understand its financial needs, objectives, and strategy. This includes advising the company on the type of securities to issue (equity or debt), the amount to be raised, and the method of issue (IPO or FPO). The merchant banker also evaluates the company’s readiness for listing and offers strategic guidance to improve its prospects.
- Due Diligence:
A thorough due diligence process is carried out to ensure that the company complies with all regulatory requirements and that the information provided to potential investors is accurate and complete. This includes reviewing the company’s financial statements, legal standing, business operations, and management team. Due diligence ensures that no misleading or inaccurate information is presented to investors, minimizing legal risks for both the company and the underwriters.
- Drafting of Offer Documents:
Merchant banks are responsible for preparing key documents for the issue. These documents include the Draft Red Herring Prospectus (DRHP) or Offer Document, which outlines important details of the company, its financials, management, risks, and the purpose of the funds being raised. The document must be submitted to the Securities and Exchange Board of India (SEBI) for approval before the public offering can proceed.
- Pricing the Issue:
Determining the right price for the securities being offered is critical to attracting investors. Merchant bankers analyze market conditions, competitor pricing, and the financial health of the company to recommend an appropriate price band. This is crucial in balancing the interests of the issuing company (ensuring they raise sufficient funds) and potential investors (ensuring the issue is attractive enough to be subscribed).
- Marketing and Promotion (Roadshows):
To create awareness and interest among potential investors, the merchant banker organizes roadshows and marketing campaigns. These involve meetings with institutional investors, high-net-worth individuals (HNIs), and analysts to present the company’s case and attract interest in the offering. These roadshows help to assess the market’s interest and demand for the issue.
- Underwriting the Issue:
Merchant banks often provide underwriting services for public issues, wherein they guarantee to purchase any unsold shares. This ensures the issuer that the entire offering will be sold. Underwriting protects the issuer from any shortfall in the sale of securities and provides confidence to potential investors.
Post-Issue Management
Once the issue is completed, post-issue management becomes crucial in ensuring that the securities are successfully listed on the stock exchanges and that the issuer meets all the compliance requirements.
- Allotment of Securities:
After the issue, the merchant banker manages the allotment process, which involves determining which investors receive the shares and in what quantity. This is done based on the subscription received during the issue. The allotment must be carried out in a fair and transparent manner, and the shares must be allocated as per SEBI regulations.
- Listing and Trading:
Merchant banks assist in the listing of the securities on the stock exchanges, such as the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). They help ensure that all necessary formalities are completed for the issue to be listed and traded. This involves obtaining approval from the exchanges and ensuring that all the requisite documents are filed with the relevant authorities.
- Post-Issue Compliance:
After the securities are listed, the merchant banker continues to work with the issuer to ensure compliance with ongoing regulatory requirements. This includes ensuring that the company adheres to disclosure requirements, such as submitting periodic financial reports and updating investors about any material changes in the business. The merchant banker ensures that the company maintains transparency and complies with SEBI’s listing regulations.
- Stabilization Activities:
In cases where the market price of the securities falls significantly below the issue price post-listing, the merchant banker may intervene to stabilize the market. This may involve market-making activities, such as buying back shares or ensuring adequate liquidity in the market to prevent sharp price declines. Such stabilization activities help in maintaining investor confidence.
- Communication with Investors:
After the issue, it is essential for the merchant banker to maintain clear and open communication with investors. This includes addressing investor queries, providing updates on the performance of the securities, and offering assistance during any post-issue processes, such as transfer or conversion of shares.
- Handling Refunds:
If any investors were unable to receive the full allotment of shares due to oversubscription, the merchant banker is responsible for processing refunds to those investors. Ensuring timely and accurate refunds is an essential part of post-issue management.
