IPO – Agreement with Investment bank

A company first informs the underwriter how much capital it wants to raise through IPO. Then the merchant bank analyzes the market conditions and the goodwill the company has in the market and lets the firm know if they can raise that much amount. Once the capital to be raised is frozen fee structure to be paid to the investment bank (merchant bank) is finalized.

There are two types of structures as far as the underwriting is concerned.

Firm Commitment basis
Best efforts basis

Firm Commitment basis: In this type of agreement the investment bank agrees to underwrite the issue i.e. it buys the shares from the firm and sells them in IPO. If some part of the issue is not subscribed then it will have to take the responsibility and hold the shares. However it can sell them off in secondary market in favorable conditions, if they want. In this process, the merchant banker acts as a dealer and the spread (difference between the price it offers to public and the price at which it buys from the firm) is the profit. Read more

December 21, 2008 | Filed Under Stocks | Leave a Comment

IPO – Role of Underwriter

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. Read more