Syndicate Members in IPOs: Roles, Types, and Risks Explained

You might know that a company conducts Initial Public Offerings or IPOs to raise funds. It offers its shares to the public and thus becomes a public company from a privately held company. The syndicate members play a major factor in the process. 

Who are syndicate members?

Syndicate, in simple terms, means a group formed by people or companies with similar interests. Syndicates are formed for various reasons in the corporate sector. For example, in the stock market, a syndicate is formed by a company interested in bringing an IPO.

Suppose a company, ABC, wants to bring an IPO. This company would now approach an investment bank, XYZ, to help ABC with its IPO. XYZ can either manage the entire IPO process or take other banks with it and organise an IPO for ABC. Thus, a syndicate would now work for ABC until it puts forth its IPO in the market.  

Types of Syndicates

Various kinds of syndicates are formed to perform different yet important functions of the IPO.

1. Lead Managers

Also known as merchant bankers or book builders, lead managers are the most important part of an IPO. The primary function of lead managers includes drafting the prospectus and preparing the underwriting agreements. In addition, they work on negotiations that would bring higher benefits for the company, i.e., the issuer.

2. Co-Managers

Co-managers are not as important as lead managers, but they, too, are important for the better functioning of an IPO. Co-managers are the advisors to the company. They help the company analyse the situations better and thus help them take better decisions.

3. Book-Running Lead Managers

Book-running lead managers are an assimilation of lead managers and co-managers. They help with the underwriting prospectus and distribution information and act as guidance and assistance to the company in the entire process.

What Is Syndication Risk?

Syndication risk arises when syndicate members, or underwriters, cannot successfully allocate the entire issue to investors. This concern is particularly relevant for companies aiming to issue a substantial amount of debt.

Imagine a scenario where a company plans to issue $500 million in debt, but underwriters struggle to find sufficient interested investors at a reasonable price. In such cases, syndicate members may need to take back some of the debt on their balance sheets, with the intention of selling it at a loss later on if necessary.

The severity of this situation hinges on various factors, including economic conditions, the debt amount, and other influencing variables. If the debt becomes too burdensome for underwriters to absorb, it could jeopardize their financial stability. Additionally, economic factors may prolong the selling process, compounding the challenge.

How Do Syndicates Influence IPO Pricing?

The pricing of an IPO undergoes multiple steps, with syndicate members playing a crucial role in the determination process. These members collect insights from experienced sales personnel with knowledge of IPOs, stock exchanges, and growth prospect analysis.

Equity syndicate members convene to decide on the equity IPO price through a closed bidding process. Once a consensus is reached on pricing, they receive an allocation of shares before the IPO goes public. Any subsequent profits or losses are shared among syndicate members based on changes in the IPO price.

In conclusion, syndicate members are indispensable actors in the intricate dance of IPOs, serving as intermediaries and risk-bearers. They influence pricing decisions, collaborate to form syndicates and navigate syndication risks. Understanding their roles and the dynamics of syndication is essential for both companies seeking to go public and investors looking to participate in IPOs.

What Is the Role of a Syndicate Member?

Syndicate members shoulder several responsibilities crucial to the IPO process. They serve as intermediaries between investors and the issuer company, distributing copies of the Red Herring Prospectus and application forms to potential investors.

Once they receive bidding details for IPO shares, syndicate members input this information into an electronic bidding system, generating a transaction registration slip (TRS) that includes price and demand options. Investors have the flexibility to modify their bids during a pre-defined period but must engage the same syndicate member for any adjustments.

All funds received from investors are placed into an escrow account maintained by the issuer company. Subsequently, application forms and supporting documents are sent to the registrar of the issue for further processing.

During the bidding registration process, syndicate members capture vital information about investors, including their name, investor category (e.g., individual, corporate, NRI, mutual fund), bid quantity, bid price, application form number, depository participant identification number, beneficiary account client ID, and whether margin amounts were paid during application submission.

Importance of Syndicates

Syndicates play a very important role for a company in its IPO. They are the ones who help the company prepare its prospectus. A prospectus is an official document that encloses all the important details of a company. This prospectus is then published on the official site of SEBI where you can check a prospectus of any company before investing in it.Note – Looking into a company in depth before investing in it is the first step towards intelligent investment. Thus, Shoonya brings you its advanced comparability tools. With Shoonya, you can look into a company’s risks and compare two companies to analyse a better option for yourself.

FAQs

What is the significance of syndicate members in an IPO?

Syndicate members are vital intermediaries that facilitate the sale of shares during an IPO. They connect investors with the issuing company and play a pivotal role in pricing and risk management.

Can syndicate members collaborate with banks from different geographical locations?

Yes, syndicate members can choose banks and entities from various locations to form a syndicate, offering flexibility in the IPO process.

What happens if an IPO is undersubscribed, and how does syndication risk affect syndicate members?

When an IPO is undersubscribed, syndicate members may need to purchase unsubscribed shares, potentially incurring losses when selling them later, which is known as syndication risk.

Who is a syndicate member in India?

A syndicate member in India is a registered commercial or investment bank, either with SEBI or as a broker on stock exchanges like BSE or NSE. They play a crucial role in underwriting IPOs, acting as intermediaries between issuer companies and investors bidding for IPO shares.

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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.