Syndicate Member: Role in IPO, Types and Syndication Risk

Making a company public through an Initial Public Offering (IPO) is a complex process involving multiple stakeholders. One of the most important players in this process is the syndicate, who helps in streamlining this process. Syndicate plays an important role in determining the success of the IPO process, which includes maximising the company’s valuation and balancing the investors’ expectations.

Who is a Syndicate Member?

A syndicate is an organisation that serves as a go-between for prospective investors and the business issuing its shares through an initial public offering (IPO). An investment bank or a Scheduled Commercial Bank (SCB) may be a syndicate member; however, they must first register with the Securities and Exchange Board of India (SEBI).

A syndicate member’s main responsibility is to help the business make the initial public offering (IPO) successful. The member would receive a commission in exchange for its services, which is typically disbursed from the IPO’s earnings. The syndicate offers several services, such as managing the IPO bidding process, creating and disseminating the prospectus, underwriting the shares designated for sale through the IPO, and managing investor funds.

The corporation may select a syndicate member to work alone or to join a syndicate with other investment banks and Scheduled Commercial Banks. It is not required for the other members selected by the lead syndicate member to reside in the same region as the business.

Role of a Syndicate Member

Syndicate members are financial institutions or investment banks that team up to execute an IPO. Their main goal is to manage financial risk while providing the issuing company the capital it seeks. The following are the roles of the Syndicate Member:

• Syndicates are responsible for distributing copies of the Red Herring Prospectus and application form to prospective investors. A Red Herring Prospectus (RHP) is a preliminary document filed by a company planning to issue an Initial Public Offering (IPO). It contains essential details about the company’s financials, business operations, risks, and objectives but does not include the final price or number of shares being issued.
• Syndicates create a transaction registration slip (TRS) after entering the IPO share bidding information into an electronic bidding system. The bidder’s price and demand alternatives are listed on this slip.
• You can change your bid as much as you like throughout the predetermined time frame. However, the same bidder from whom you first bid must provide the modification services.
• Syndicates transfer all investor money to the issuer company’s escrow account. They then forward application forms and accompanying documentation to the issue’s registrar for further action.

Types of Syndicates

There are several different types of syndicate members in an IPO, and they all frequently carry out identical yet crucial tasks for the IPO’s success:

1. Lead Manager

Marketing and distributing the new issue is the lead manager’s duty as a syndicate manager. Finalising all issuance details and negotiating a better deal with the issuer are the responsibilities of this syndicate member. Often, the head manager would divide profits with other banks and assist in bringing attention to the problem among their customers.

2. Co-Manager

A group of investment banks that promote on a smaller scale than lead managers is known as a syndicate. Co-managers can advise issuers during this process, but they have less control over pricing and structuring.

3. Book Running Lead Manager

A person who serves as both a lead manager and a co-manager simultaneously is known as a book-running lead manager. In addition to providing information about distribution (when the shares will be available) and potentially setting up an underwriting syndicate (or group of investors) to offer extra support and direction during the process, this individual or business is responsible for creating financial records for sales.

Syndication Risks

• Syndication risk happens when underwriters or syndicate members fail to sell the entire debt issue to investors.
• The unsold portion remains with the underwriters, creating financial risk and potential losses.
• Companies issuing large amounts of debt may struggle to find enough buyers, leading to liquidity issues.
• Economic slowdowns or uncertain market conditions increase the chances of syndication risk.
• If a company plans to issue ₹10,000 crore in bonds but investors buy only ₹7,000 crore, the underwriters must take the remaining ₹3,000 crore on their books.
• Holding unsold debt can strain financial resources, forcing underwriters to sell at a loss later.
• Proper market analysis and strategic planning help reduce this risk.

Role of Syndicates in Determining the IPO Price

Syndicates play a significant role in determining the IPO Price. Some of these are given below:

• Market Research and Analysis: They analyse industry trends, competitor pricing, and investor sentiment to determine a fair and competitive price.
• Investor Roadshows: By meeting with potential investors, they gather insights on demand, helping them fine-tune pricing strategies.
• Book-Building Process: In book-built IPOs, underwriters collect investor bids to finalise the stock price, allowing for a more accurate market-driven valuation.
• Balancing Supply and Demand: The goal is to attract investors while ensuring the company raises enough capital. Too high a price may deter investors, while too low a price may undervalue the company.
• Stabilisation Mechanisms: Syndicate members may intervene post-IPO by buying shares if the price drops too much, maintaining stability and investor confidence.
• Institutional Investor Feedback: By engaging with large investors before the IPO, underwriters better understand what price range will attract demand without excessive volatility.

Conclusion

Syndicate members are the backbone of a successful IPO. They ensure a smooth transition from private to public trading, from underwriting and managing risk to setting the right price. Different syndicate structures allow companies to choose the right approach for their needs, but the process isn’t without risks. Market volatility, pricing challenges, and regulatory hurdles can all impact an IPO’s outcome.