The Role of Underwriters in IPO Success

Who is an Underwriter in an IPO?

Underwriters are the intermediaries, who are also financial experts, between potential investors and companies planning to go public in the stock market. These intermediaries are generally investment banks. They specialize in facilitating companies right from issuance to allocation of securities. They ease the whole process of companies releasing their IPO by performing multiple roles.

Underwriters assess the company’s financial health, business model, and future prospects of the industry. These factors thereby contribute to the determination of the offering price of stocks. Furthermore, underwriters enter into an agreement with the issuer that outlines the necessary terms & conditions on how IPO allotment works and other such considerations.

Role of an IPO Underwriter

Some of the common roles and responsibilities of IPO underwriters include:

1. Assess the Potential Risks of an IPO

One of the major responsibilities of an underwriter is to assess the risks with regard to a public issue of shares. The success or failure of launching an IPO can have long-term consequences on the business operations of the issuing company.

For instance, the issuer may not be able to generate a sufficient amount of funds, which may lead to huge losses. When a company goes public, its owners are obliged to dilute their stake. It is important to demonstrate themselves to be more transparent and accountable.

2. Assists in the Preparation of DRHP

Once a company decides to launch an IPO, it becomes mandatory for it to file a DRHP (Draft Red Herring Prospectus). The DRHP is filed with the market regulator. This document is prepared only after a dedicated consultation with the underwriter.

The issuing company should mention a range of crucial details in the document. These include the expected number of equity shares that the issuer wants to offer, the main purpose of the offer, the strengths and weaknesses of the company, and more.

3. Ensures Regulatory Compliance

IPO underwriters, through their expertise, help the issuing companies understand how they can adhere to the regulatory compliance guidelines of the market regulator – SEBI. For instance, the underwriters advise the issuing companies so that the IPOs launched are neither undervalued or overvalued. IPO Underwriters also ensure that the issuing companies meet the required guidelines timely and release the necessary data for investors’ scrutiny.

4. Provides Guarantee

There are different types of underwriter agreements that companies tend to enter with their underwriter. Most commonly, underwriter agreements ensure that the minimum number of shares allotted needs to be sold. Alternatively, underwriters guarantee a certain revenue as they purchase a specific proportion of shares themselves and further sell them to the public.

Conclusion

The IPO underwriters play a crucial role in the launch of IPOs. They ensure that the issuing company meets all the criteria/parameters required by the stock market regulators and public exchanges. The IPO underwriter gains ground for the issuer company so that potential investors show interest in the new company and readily take up an IPO subscription. 

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