INTERMEDIARIES IN NEW ISSUE MARKET

The important intermediaries/players in the new issue market are:

1. Merchant Bankers (Managers to the Issue)
2. Registrars to the Issue
3. Underwriters
4. Brokers to the Issue
5. Collecting and Coordinating bankers
These are dealt as follows:
1. 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).
DSP Merril Lynch Ltd., ICICI Securities, SBI Capital Markets Ltd., JP
Morgan India Pvt. Ltd., ABN AMRO Securities (India) Pvt. Ltd. Etc. are few
names of merchant bankers acted as managers to issue in recent public
issues.
2. 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.
The Lead manager coordinates with the Registrar to ensure follow up so
that that the flow of applications from collecting bank branches, processing
of the applications and other matters till the basis of allotment is finalized,
dispatch security certificates and refund orders completed and securities
listed. 66 SEBI registered R&T agents are now functioning. E.g., Karvy
Computershare Pvt. Ltd., Ankit Consultancy Pvt. Ltd., CANBANK
Computer Services Ltd., Deutsche Investor Services Pvt. Ltd. etc.
3. Underwriters to the Issue:
Underwriters are financial institutions who make a firm commitment that
they will take up the shares up to a certain amount if the public does not
subscribe to it. This is an agreement with one or more institutions and a
guarantee of the marketability of shares. Under writing is mandatory for
the Public Issue. Underwriters are appointed by the company in
consultation with the managers to the issue. Financial institutions, bankers,
members of stock exchanges, investment companies, trusts etc. can act as
under writers.
Methods of Underwriting
An underwriting agreement may take any of the following forms:
i. 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.
ii. Outright Purchase:
In this method the underwriters purchases the entire issues at an agreed
price and sell them to investors.
iii. 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.
iv. 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.
v. 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.
vi. 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.
vii. 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.
Underwriters play a significant role in new issues market.
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.
4. Brokers to the Issue:
Brokers are persons authorized to market the issues. Companies can engage
any number of brokers to market the new issue. The brokers may engage
sub-brokers and they send their own circulars, publicity materials and
applications to the clients and follow up the work for canvassing the
subscription. Brokers to the issue are not compulsory for public issues, but
their expertise and contacts with investors could be used for marketing the
issue.
Remuneration to the broker and terms and conditions of brokerage is fixed
by SEBI. There are 10,000 brokers and more than 70,000 sub-brokers
registered with SEBI. Geojith BNP Paribas Financial Services Ltd., JRG
Securities Ltd., Karvy Stock Broking Ltd., UTI Securities Ltd., UAE
Exchange & Finance Ltd., Sharekhan Ltd. etc. are names of few well known
brokers.
5. Collecting and coordinating Bankers to the Issue
Collecting bankers collect the subscriptions in cash, cheque, stock invest
etc.
Coordinating bankers collect information on subscriptions and coordinate
the collection work.
They monitor the work and inform it to the registrars and merchant
bankers. Collecting or coordinating bankers may be the same bank or
different bankers.