What Is a Merchant Banker and What Role Do They Play in an IPO

When a company decides to go public, it takes months of preparation which involves legal scrutiny, regulatory filings, investor meetings and pricing decisions. They need an expert to guide them through every step. That expert is a merchant banker.

What Is a Merchant Banker

A merchant banker is not the same as a commercial bank. A commercial bank takes deposits and gives loans. A merchant banker provides financial advisory and capital market services, helping companies raise money by issuing shares, bonds or other securities.

Merchant bankers in India include dedicated investment banking arms of large financial institutions such as Kotak Mahindra Capital, Axis Capital, ICICI Securities, JM Financial, SBI Capital Markets and Edelweiss Financial Services, among many others.

Regulatory Framework Governing Merchant Bankers in India

SEBI (Merchant Bankers) Regulations, 1992, are the primary legislation governing merchant bankers. Main provisions include the following. Any entity acting as a merchant banker must hold a valid SEBI certificate. Registration must be renewed periodically and can be suspended or cancelled by SEBI for violations. Merchant bankers acting as lead managers to public issues must maintain a minimum net worth of ₹5 crore. A code of conduct, to act with integrity, disclose all material information, avoid conflicts of interest and exercise due diligence in every assignment. SEBI has the power to inspect merchant banker books and records, call for information and take enforcement action, including debarment for misconduct or negligence in their role.

Role of a Merchant Banker in an IPO

Their responsibilities span the entire IPO lifecycle.

Due diligence and assessment Before filing, a merchant banker examines the company’s financials, legal position, business model, and risks. They are legally responsible for the accuracy of disclosures in the offer documents. A credible merchant banker suggests stronger due diligence and more reliable disclosures, but it does not guarantee the company’s quality or future performance.

What investors should do: Do not rely only on the merchant banker’s reputation. Always review key risks, financials, and business details yourself before applying.

Drafting the Draft Red Herring Prospectus (DRHP) The DRHP is the main document filed with SEBI before an IPO. It includes financials, purpose of the issue, risks, promoter details, and offer terms. The merchant banker prepares and certifies it.

What investors should do : Read the DRHP carefully, especially the risk factors, use of funds, and financial trends, as it is the most important source of information before investing.

Filing with SEBI and Stock Exchanges -

The merchant banker submits the DRHP to SEBI and the relevant stock exchanges. SEBI reviews the document and may raise observations. The merchant banker responds to these observations and ensures the final prospectus meets all regulatory requirements before the issue opens.

1. Pricing the Issue - In a book-built issue, the merchant banker helps the company determine the price band within which investors can bid. This involves analysing comparable company valuations, market conditions, and investor appetite gathered during pre-IPO interactions.

2. Roadshows and Investor Marketing - The merchant banker organises roadshows where the company's management presents to institutional investors, analysts and high-net-worth individuals (HNIs). These presentations are critical to building demand for the issue before it opens.

3. Managing the Bidding Process - During the IPO subscription period, the merchant banker coordinates with stock exchanges, registrars, and banks to ensure the bidding process runs smoothly and all applications are processed correctly.

4. Allotment and Listing - After the issue closes, the merchant banker oversees the allotment of shares in coordination with the registrar to the issue, ensures refunds are processed for unsuccessful applicants, and facilitates listing on the stock exchange.

Book running lead manager, co-book running lead manager and syndicate member explained

Large IPOs often involve multiple merchant bankers with different levels of responsibility.

The number of BRLMs permitted depends on the issue size. SEBI prescribes the maximum number of lead managers based on the size of the public issue to ensure accountability is not diluted across too many parties.

How Merchant Bankers are Appointed and What They Charge

The company's board of directors selects and appoints the merchant banker. Selection criteria include the banker's track record in similar-sized IPOs, sectoral expertise, distribution reach, research capability and proposed fee.

Merchant banker fees are negotiated on a case-by-case basis and are structured as a percentage of the total issue size. For large IPOs, fees generally range from 1% to 5% of the total funds raised, though this varies significantly based on issue complexity and competitive dynamics. For smaller SME IPOs, the percentage can be higher.

Due Diligence - The Critical Responsibility of a Merchant Banker

The merchant banker must verify every material fact disclosed in the DRHP. This includes independently verifying financial statements, checking for pending litigation, examining regulatory approvals and licences, assessing related-party transactions, and evaluating the promoter's background. When due diligence fails, the consequences are serious. SEBI can take action against the merchant banker for inadequate disclosure. Investors who suffer losses due to misleading information in the prospectus can seek legal redress. High-profile cases where post-listing performance raised questions about IPO disclosures have resulted in SEBI investigations into the role of the lead managers.

SEBI's Oversight and Accountability Framework for Merchant Bankers

SEBI maintains a publicly available list of all registered merchant bankers on its website. It conducts periodic inspections, reviews offer documents and investigates complaints. Merchant bankers have ongoing reporting obligations to SEBI and must submit half-yearly reports on their merchant banking activities. SEBI can impose penalties, suspend registration, or debar merchant bankers for violations of the regulations or the code of conduct.

After the Paytm IPO in 2021, which listed at a steep discount and drew widespread criticism over pricing and disclosure quality, SEBI intensified scrutiny of the due diligence and pricing processes followed by lead managers in large consumer technology IPOs. This has led to more rigorous internal review processes at leading merchant banking firms.

Merchant Banker vs Investment Bank vs Underwriter

These three terms are often used interchangeably but they are not the same.

In practice, many large financial institutions perform all three roles simultaneously in a single IPO, wearing different regulatory hats for each function.

List of SEBI-Registered Merchant Bankers in India

SEBI's website maintains the full list of registered merchant bankers. Some of the most active in large-cap IPOs include Kotak Mahindra Capital Company, Axis Capital, ICICI Securities, JM Financial, SBI Capital Markets, Edelweiss Financial Services, Goldman Sachs India Securities, Morgan Stanley India, DSP Merrill Lynch, and HDFC Bank's investment banking division.

For SME IPOs on NSE EMERGE and BSE SME platforms, a separate set of smaller registered merchant bankers are active, as the regulatory requirements and issue sizes differ from mainboard IPOs. Investors researching a specific IPO can check the DRHP cover page, which always lists the names and contact details of all book running lead managers appointed for that issue.

Post-IPO Responsibilities of a Merchant Banker

Post-listing obligations include monitoring the utilisation of IPO proceeds against the objects stated in the prospectus, submitting monitoring reports to SEBI for issues above a prescribed size, overseeing the price stabilisation mechanism if a greenshoe option was exercised and supporting the company in its transition to a listed entity with ongoing disclosure obligations.

These post-listing responsibilities can extend for one to two years after the IPO, making the merchant banker a long-term partner in the company's journey as a public entity rather than just a transaction facilitator.

Frequently Asked Questions

Is a merchant banker the same as an investment bank?

Not exactly. In India, merchant bankers are a specific SEBI-registered category under the SEBI (Merchant Bankers) Regulations, 1992. Investment banking is a broader global term covering a wider range of financial advisory services. Many firms in India perform investment banking functions under their SEBI merchant banker registration.

Can a company do an IPO without a merchant banker?

No. SEBI regulations mandate that every public issue must have at least one SEBI-registered merchant banker acting as the book running lead manager. There is no provision for a company to self-manage a public issue without a registered intermediary.

How many merchant bankers can an IPO have?

SEBI prescribes the maximum number of lead managers based on issue size. Smaller issues may have one or two BRLMs while very large IPOs can have five or more. There is no fixed cap on syndicate members.

What is the difference between a DRHP and a prospectus?

The Draft Red Herring Prospectus is filed with SEBI before the issue opens and does not contain the final price or issue size. After SEBI review and incorporation of observations, the final Red Herring Prospectus is filed with the price band, and the final Prospectus is filed after the issue closes with the final issue price and allotment details.

What happens if the merchant banker makes an error in the DRHP?

The merchant banker is legally liable for the accuracy of disclosures in the offer documents. If material information is found to be incorrect or misleading, SEBI can initiate enforcement action against the merchant banker including penalties, suspension of registration, or debarment. Investors who suffer losses due to misleading disclosures also have legal recourse.

How do I check if a merchant banker is SEBI registered?

Visit SEBI's official website at sebi.gov.in and navigate to the intermediaries section, where a searchable database of all registered merchant bankers is maintained and updated regularly.