Syndicate Member: Role in IPO, Types and Syndication Risk
Syndicate members play an important role when a company launches its IPO. When a company goes public, it asks several banks to give suggestions on how they should be going public. A company then selects the bank with the best suggestion and underwriters of the said bank take responsibility to sell all shares of that company. These underwriters are called syndicate members or syndicates.
Who Is a Syndicate Member?
A syndicate member is an investment banker, or commercial bank, that has the mandate to sell shares of IPO to qualified applicants. These members should be registered with the market regulator, SEBI (Securities & Exchange Board of India), or registered as brokers with stock exchanges for underwriting IPOs.
Syndicates work as intermediaries between an investor and a company that issues shares through an IPO. Investors who wish to subscribe, invest through intermediaries chosen by the issuer company.
The selected bank can then choose other banks and entities to form a syndicate. These banks do not necessarily have to be from the same geographical location as the issuer company.
What Is the Role of a Syndicate Member?
Apart from being an intermediary between an investor and an issuer company, syndicates are also responsible for circulating copies of the Red Herring Prospectus and application form to potential investors.
Once syndicates receive the bidding details for IPO shares, they enter those into an electronic bidding system and generate a transaction registration slip (TRS). This slip contains price and demand options for the bidder.
You can modify your bid as many times as you want during the pre-defined period. However, you have to avail services from the same bidder for modification from whom you placed your bid in the first place.
Syndicates send all the funds received from investors into an escrow account of the issuer company. Then they send application forms along with supporting documents to the registrar of the issue for further proceedings.
When a syndicate member registers a bid, it has to enter the following details of an investor in the online system:
- Name of investor
- Category of the investor such as corporate, individual, NRI, mutual fund, FII, etc.
- Quantity of bid
- Price of bid
- Application form number
- Depository participant identification number
- Client ID of the beneficiary account of a bidder
- If investors have paid the margin amount while submitting the application form or not
What Are the Types of Syndicates?
There are often different ranks of syndicate members in IPO with somewhat similar functions. Let’s find out about them:
Lead Manager or Syndicate Manager is the distributor or marketer of the IPO issue. It is responsible for finalising all the details regarding the new issue with the issuer and negotiating to reach a positive agreement. A Syndicate Manager might share the profit with other partner banks who would help it in promoting the issue to the customers or clients.
Book Running Lead Manager
A book running lead manager often performs the tasks of both a lead manager and a co-manager. This entity usually has the responsibility to set up financial sales records, give information regarding distribution such as when shares will be available for bidding, and arrange an underwriting syndicate for additional guidance throughout the process.
Co-managers are similar group of investment banks that helps in promotion but on a smaller scale as compared to lead managers. These managers may provide suggestion or advice during the process but do not have much say about structuring and pricing.
What Is Syndication Risk?
Syndication issue arises when syndicate members or underwriters of fixed income security are not able to place the entire issue to the investors. This can mainly be a serious concern for companies who want to issue a large amount of debt.
Let’s understand this with the help of an example.
Suppose, a company is trying to issue a $500 million debt. But underwriters are unable to arrange or find enough interested investors to buy all of this at a reasonable price. In such situations, syndicate members may have to take back some of this debt on their balance sheet to sell it at loss later on, eventually.
Such situations are pretty common in financial transactions. The consequence of this situation depends on many factors such as economic condition, amount of debt and any other impacting factors.
If the debt is too much for underwriters to take back, it can make their balance sheets insolvent. Also, economic factors can delay the process of selling them faster, even before they need more capital.
What Role Do Syndicates Play in Determining the IPO Price?
There are multiple steps involved in determining the price of an IPO.
Primarily, syndicates or underwriters collect information from sales personnel who have experience in IPOs, stock exchanges and growth prospect analysis. The equity syndicate members then arrange a meeting where only members are allowed to participate.
These members use a close bidding process to determine the equity IPO price. Once the members agree on pricing, they get an allocation of a percentage of shares before it goes public. When the IPO goes public, they share the profit or loss, whichever incurred, based on the changes in the IPO price.
Syndicate members play a significant role for the issuer companies in their IPO process. The IPO performance depends a lot on the syndicates. Hence, issuer companies need to choose their syndicates carefully.