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?
A syndicate member is an entity that acts as an intermediary between potential investors and the company issuing its shares through an IPO. A syndicate member can either be an investment bank or a Scheduled Commercial Bank (SCB), but they would have to first be registered with the Securities and Exchange Board of India (SEBI).
The primary role of a syndicate member is to assist the company in making the IPO a success. In return for its services, the member would get a commission which is usually paid out from the proceeds of the IPO. Some of the services provided by the syndicate include the underwriting of the shares earmarked for sale via the IPO, drafting and circulating the prospectus, management of the IPO bidding process and management of funds received from investors, among others.
A syndicate member chosen by the company may either operate alone or choose to rope in other investment banks and Scheduled Commercial Banks to form a syndicate. The other members chosen by the lead syndicate member need not be from the same geographical location as the company.
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 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.
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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