Who is a Syndicate Member?

A company desirous of raising funds through the sale of its shares to the public for the first time goes through a long-drawn process known as the Initial Public Offering (IPO). If you’re interested in investing in IPOs of companies, you need to know the different parties associated with them.

One of the most important parties to an Initial Public Offering other than the company itself is the syndicate member. Wondering who a syndicate member is and the kind of role they play? Here’s everything you need to know.

Who is a Syndicate Member?

An Initial Public Offering (IPO) is the process through which a private company offers its shares to the public for the first time. This step helps the company raise capital for expansion and other business needs while providing a new investment opportunity for the public. But, this complex process cannot be run by the companies alone. An important participant in the IPO lifecycle is the syndicate member.

A syndicate member is a financial intermediary involved in the process of IPOs. Typically, these members are banks, brokerage firms, or other financial institutions that are registered with the Securities and Exchange Board of India (SEBI). They work together to underwrite and distribute the shares of a company going public, as part of a larger group called the underwriting syndicate. This is coordinated by a lead manager or book-running lead manager. The syndicate members ensure that the shares reach a broad investor base, factyilitating a successful IPO.

Who can be a Syndicate Member?

Any SEBI registered financial institution that meets specific regulatory and financial criteria can become a syndicate member. This includes:

• Commercial Banks:

  Major banks with significant financial resources and underwriting capabilities.

• Investment Banks:

  Institutions specialising in underwriting and managing IPOs.

• Brokerage Firms:

  Firms that act as intermediaries between investors and the company issuing shares.

• Financial Advisors:

  Certified advisors who have the credentials to participate in IPO syndication.

These entities must have a strong track record, regulatory approval, and sufficient capital to support the underwriting process. They also need to adhere to guidelines set by regulatory bodies such as SEBI (Securities and Exchange Board of India).

Types of Syndicate Members

Now that you’re aware of the meaning of a syndicate member let’s take a quick glimpse at the different types of members that are often associated with an IPO.

• Lead Manager

  The lead manager is a syndicate member entity that’s responsible for marketing and distributing a public issue. They often work closely with the issuing company to finalize key details regarding the structuring and pricing of the IPO to ensure that the company gets the maximum possible benefits from the issue. The lead manager sometimes appoints co-managers to help make the issue a success and may even share a portion of its commissions.

• Co-Manager

  The co-manager is an entity that also markets and distributes a public issue. However, they often do it on a smaller scale compared to the lead manager. A co-manager of an issue may offer advice and assistance during the IPO process but is not involved in the structuring and pricing of the issue.

• Book-Running Lead Manager (BRLM)

  The book-running lead manager is the entity that’s responsible for organizing the IPO. Their responsibilities include collating financial information, drafting the prospectus, getting the necessary approvals from the regulatory authorities and stock exchanges and drafting a detailed distribution plan, among others. The BRLM has the authority to appoint additional lead managers or co-managers to an issue.

What Is the Role of a Syndicate Member?

Syndicate members perform several vital functions in the IPO process:

• Due Diligence:

  They conduct thorough due diligence on the issuer and the securities to ensure they meet regulatory standards and are attractive to investors.

• Advisory:

  They provide strategic advice to the issuing company on pricing, timing, and other crucial aspects of the IPO process.

• Underwriting:

  They commit to buying a certain number of shares at a predetermined price, thereby guaranteeing that the company will raise the required funds.

• Marketing and Distribution:

  They promote the IPO to potential investors and handle the distribution of securities, using their extensive networks to ensure a broad and diverse investor base while reducing risk concentration.

• Pricing and Allocation:

  They collaborate with the issuer to determine and adjust the initial offering price based on market demand and conditions. They also help in deciding how the securities will be distributed among investors.

• Price Stabilisation:

  Post-IPO, they may buy or sell shares to stabilise the stock price and prevent excessive volatility.

What is Syndication Risk?

An IPO may still go undersubscribed despite the syndicate members’ best efforts to market and distribute a public issue. In such cases, it falls upon the members of the syndicate to purchase the unsubscribed portion of the IPO shares. These shares are then sold by the members, often at a loss, at a later point in time. The risk of syndicate members having to underwrite an issue is known as the syndication risk.

Here’s an example to help you understand how syndicate members underwrite a public issue. Assume that a company - ABC Limited wants to raise Rs. 1,000 crores via an IPO. The issue is underwritten by three syndicate members. Unfortunately, due to low public demand, only about Rs. 800 crores worth of shares were subscribed. Since the issue is undersubscribed, the syndicate members step in and purchase the remaining Rs. 200 crores worth of unsubscribed shares. These are then sold in the market once the company’s shares are listed on the exchange.

Syndication risk is a major issue for most members. Taking on too many unsubscribed shares from their clients within a short period may even lead the syndicate member to financial instability.

What Role Do Syndicates Play in Determining the IPO Price?

Syndicate members play a crucial role in setting the IPO price through a process known as book building. Here's how it works:

• Market Research:

  They conduct comprehensive market research and analyse investor sentiment to gauge the demand for the IPO.

• Roadshows:

  Syndicate members organise roadshows and meetings with potential investors to generate interest and gather feedback on pricing.

• Book Building:

  Based on the feedback and market conditions, they collect bids from investors, which helps them determine the optimal price range.

• Final Pricing:

  After evaluating the bids and demand, the syndicate members, along with the lead manager, set the final IPO price.

This collaborative process ensures that the IPO is priced accurately, balancing the interests of the issuing company and the investors.

Conclusion

A syndicate member plays a very crucial role in the IPO process. Since the success of an Initial Public Offering is heavily dependent on the actions of the members, most companies generally tend to appoint them only after much deliberation.

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