Syndicate members play a crucial role in the complex world of Initial Public Offerings (IPOs), acting as intermediaries between companies going public and potential investors. In this article, we’ll look into the responsibilities, types, and potential risks associated with being a syndicate member.
Role of a Syndicate Member in an IPO
When a company decides to go public, it seeks proposals from various banks on how to execute the process. The selected bank becomes the lead underwriter, and its underwriters, known as syndicate members, take on the responsibility of selling all shares of the IPO.
These syndicate members, typically investment bankers or commercial banks, must be registered with the market regulator, such as SEBI in India, or be registered brokers with stock exchanges.
The syndicate members act as intermediaries between investors and the company issuing shares. Investors subscribe and invest through these intermediaries, who play a pivotal role in the IPO process.
Also Read : What is Shelf Prospectus- How can Investor Benefits from it?
Responsibilities of a Syndicate Member
Apart from facilitating the buying and selling process, syndicate members are responsible for distributing key documents like the Red Herring Prospectus and application forms to potential investors. They also manage the bidding process, entering details into an electronic system and generating Transaction Registration Slips (TRS) that include bid quantity, price, and other essential information.
Investors can modify their bids within a predefined period, but such modifications must be done through the same syndicate member who initially received the bid. All funds collected from investors are placed in an escrow account of the issuing company, and application forms with supporting documents are sent to the registrar of the issue for further processing.
Types of Syndicate Members
- Lead Manager:
- Role: The lead manager is the marketer and distributor of the IPO, finalizing details and negotiating with the issuer.
- Profit Sharing: Often shares profits with other banks assisting in promoting the issue.
- Book Running Lead Manager:
- Role: Functions as both lead manager and co-manager, handling financial records, distribution information, and potential underwriting syndicates.
- Co-Manager:
- Role: A group of investment banks that promotes on a smaller scale, providing advice but with less influence on structuring and pricing.
Understanding Syndication Risk
Syndication risk arises when syndicate members or underwriters cannot place the entire issue with investors. This becomes a concern, especially for companies issuing significant amounts of debt.
For instance, if a company aims to issue a large debt amount, and there are not enough interested buyers at a reasonable price, syndicate members may need to take back some of the debt on their balance sheets, eventually selling it at a loss.
This practice, while common in financial transactions, can have consequences depending on factors like economic conditions and the amount of debt involved. If the debt is substantial, it may impact the balance sheets of underwriters, potentially leading to insolvency.
Syndicate Members’ Role in Determining IPO Price
The pricing of an IPO involves collecting information from experienced sales personnel, growth prospect analysis, and a close bidding process conducted by syndicate members. Once an agreement on pricing is reached, syndicate members receive a percentage of shares before the IPO goes public.
Also Read : How to Analyze an IPO for investment?
Final Thoughts
In conclusion, syndicate members play a significant role in the success of an IPO, acting as crucial intermediaries. The careful selection of syndicate members by issuer companies is paramount for a smooth and successful IPO process.
Understanding the types, responsibilities, and potential risks associated with syndicate members is essential for both investors and companies entering the IPO.
Frequently Asked Questoins (FAQs)
Q1: What is the role of a syndicate member in an Initial Public Offering (IPO)?
A: Syndicate members act as intermediaries between companies going public and potential investors. They are responsible for facilitating the buying and selling process of IPO shares, distributing essential documents, managing the bidding process, and ensuring compliance with regulatory requirements.
Q2: How does a company choose a syndicate member for its IPO?
A: When a company decides to go public, it invites proposals from various banks. The bank with the most compelling proposal becomes the lead underwriter, and its underwriters, known as syndicate members, are responsible for selling all shares of the IPO.
Q3: What is the difference between a lead manager and a co-manager in a syndicate?
A: The lead manager is the primary distributor and marketer of the IPO, finalizing details and negotiating with the issuer. On the other hand, co-managers are a group of investment banks that promote the IPO on a smaller scale, providing advice but having less influence on structuring and pricing.
Q4: Can syndicate members be from different geographical locations than the issuing company?
A: Yes, syndicate members can be from any part of the world and do not necessarily have to be located in the same geographical area as the issuing company.
Q5: What is syndication risk in the context of an IPO?
A: Syndication risk occurs when syndicate members or underwriters cannot place the entire issue with investors, particularly in the case of companies seeking to issue significant amounts of debt. This risk may lead to syndicate members taking back unsold debt on their balance sheets, potentially selling it at a loss.
Q6: How do syndicate members contribute to determining the IPO price?
A: Syndicate members collect information from sales personnel, conduct growth prospect analysis, and participate in a close bidding process to determine the IPO price. Once an agreement is reached, syndicate members receive a percentage of shares before the IPO goes public.
Q7: What happens if syndicate members cannot sell the entire issue to investors?
A: In such cases, syndicate members may face syndication risk. They might need to take back some of the unsold debt on their balance sheets, potentially selling it at a loss. The impact depends on factors like economic conditions and the amount of debt involved.
Q8: How should companies choose their syndicate members for a successful IPO?
A: Issuer companies should carefully consider the expertise, experience, and track record of potential syndicate members. The selection process should prioritize members with a proven history of successful IPOs in the relevant industry.
Don’t Miss to Read Below IPO Related Informative Articles:
- Is PAN Card Mandatory for Applying to an IPO?
- What is an Oversubscribed IPO and Its Effects?
- How to Apply for an IPO in Minors’s Name – Benefits and Tax Implications
- 11 Common IPO Mistakes and How to Avoid them
- What is Flipping in IPO? – Explained With an Example
- What is Book Building Process in IPO? Fixed Pricing Vs Book Building
- What is Face Value in IPO?: How it is Different From Issue Price
- What is IPO Listing Gain? – Factors Influencing Listing Gain
- What Are Pre-IPO Stocks (Unlisted Shares)? Benefits and Risks
- How to Apply for an IPO Through UPI – In 7 Easy Steps
- What is Draft Red Herring Prospectus (DRHP) in IPO?
- What is a Shelf Prospectus, Criteria and How Can it Benefit an Investor?
- How to Buy IPO Online in India – Procedure and Eligibility Criteria
- What are the Difference Between Direct Listing and IPO?
- What is IPO Lot Size and How It is Calculated?