What is an underwriter in an IPO?

IPO underwriters are financial intermediaries, usually investment banks that work towards the issuance and allocation of securities. IPO underwriters perform numerous roles, depending on the agreement between intermediaries and company drafting for the IPO.

Many times, when the issue is too big, there can be multiple underwriters (referred to as syndicate) to distribute the IPO risk among the syndicate members. In 2022, LIC came up with an IPO of 21,000 Cr and they took the help of 10 investment banks. SBI Capital Markets, ICICI Securities, Kotak Mahindra Capital, Axis Capital, JM Financial, Nomura Securities, Bank of America, JP Morgan, Goldman Sachs and Citibank were the bankers to issue.

Role of underwriters

  1. Risk associated with the public issue: An underwriter has to discuss with the issuing company, the risk associated with coming up with an IPO. E.g. they alone cannot make decisions based on their business and their ability to make decisions will be impacted.

  2. Providing guarantee: There can be many types of underwriting agreements that one can have with underwriters. But the most common one is wherein the underwriters guarantee that a minimum number of shares will be sold. However, in agreements such as a best effort agreement, underwriters do not take or provide a guarantee of shares sold but put in the effort to sell as many as possible.

  3. Drafting a DRHP: A DRHP is a document that is prepared to provide financial and other information about the business to the potential investor. This is not a final document. It’s a way to communicate about the business, what the current status of the business is, the risk involved in conducting it, its prospects, current financials, market research, industry overview, promoter holdings, fundraising history and many more. This document is drafted to generate interest among the investor community before the company opens for IPO subscriptions. This can be used by investors in decision-making, like whether to apply for the IPO or not, whether the valuations are attractive or whether the issue is overvalued.

  4. Ensuring compliance is followed: IPO underwriters are specialists in their fields as they have been doing this for quite some time. They guide the issuing company about the compliance of the market regulator. Additionally, they make sure that the issuing businesses post the appropriate information on their sites for the review of investors and pay the required fees on time.

  5. Gauge market interest: IPO underwriters often contact large intermediaries like insurance companies, pension funds and mutual funds. Their interest in the upcoming prospects helps them in setting the IPO price, so that the IPO price conveys the right valuation, neither too high nor too low.

Conclusion: Underwriters play various roles, right from the idea of coming up with an IPO till finally seeing that the IPO is successfully listed.