When a company wants to raise funds through initial public offering (IPO) it appoints an investment bank for underwriting the issue. An Investment bank is also called as merchant bank. There is no regulatory restriction to use the services of a merchant bank for IPO. Since in an IPO a company participates for the first time, it doesn’t have complete understanding of the rules and documentation, required to be submitted, to get a clearance from the regulator.
Famous merchant bankers world over are Goldman Sachs, Credit Suisse and Morgan Stanley. Banks like Deutsche, Citi, UBS etc have investment banking wings. Underwriters assess and analyze firm’s current performance, firm’s future earnings potential, industry scenario, competition in the same sector, current local and global market situations etc. to decide the issue price/price band. They also work on the activities like completion of the mandatory documentation as required by the regulatory body. Underwriters charge a fee for this activity, which is generally a percentage of the issue size.
If the issue size is very large a syndicate of merchant banks takes up the task of underwriting the issue. However one merchant bank leads the other.
Sathish Emmadi
Sathish Emmadi is a co-founder & editor at Lastbull.com. He is presently working in IT for one of the world’s top mutual fund companies. Handled multiple projects in BFSI (Banking,Financial Services and Insurance) domain. An Engineering Graduate from NITW.
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