When a company decides to go public in India, the process that follows is complex, regulated, and deeply consequential. Hundreds of crores of investor money will change hands. The company’s valuation will be set in public for the first time. Regulatory filings must be flawless. Institutional investors must be convinced. Retail investors must be informed.
None of this happens without a central coordinator. That coordinator is the Merchant Banker, officially known in Indian capital markets as the Book Running Lead Manager (BRLM).
Understanding the merchant banker’s role demystifies how an IPO actually gets done in India.
Who Is a Merchant Banker
A merchant banker is a financial institution registered with SEBI under the SEBI (Merchant Bankers) Regulations, 1992. Only SEBI-registered entities can manage public issues in India.
Leading merchant bankers in India include:
- Kotak Mahindra Capital
- Axis Capital
- ICICI Securities
- JM Financial
- SBI Capital Markets
- Goldman Sachs India
- Morgan Stanley India
- HDFC Bank Investment Banking
For large IPOs, multiple merchant bankers are appointed jointly. One is typically designated the lead, with others serving as co-BRLMs.
The Starting Point: Due Diligence
Before any public document is filed, the merchant banker conducts extensive due diligence on the issuing company.
This involves:
- Reviewing audited financial statements across multiple years
- Assessing business model sustainability and competitive positioning
- Examining legal liabilities, pending litigation, and regulatory risks
- Verifying promoter background and track record
- Scrutinising related party transactions
- Understanding industry dynamics and growth outlook
The merchant banker’s reputation is on the line with every IPO it manages. SEBI holds it accountable for the accuracy and completeness of all disclosures. Thorough due diligence protects both the investor and the merchant banker itself.
Drafting the DRHP
The most visible output of early IPO preparation is the Draft Red Herring Prospectus (DRHP). This is the comprehensive disclosure document that forms the legal foundation of the entire public offering.
The merchant banker leads the drafting of this document with support from legal counsels, auditors, and the company’s management.
A DRHP covers:
- Complete business description and operations
- Financial statements for the past three to five years
- Risk factors the investor must be aware of
- Objects of the issue — how the funds raised will be used
- Promoter details and shareholding structure
- Industry overview and competitive landscape
- Regulatory and legal matters
- Management discussion and analysis
The DRHP is filed with SEBI and simultaneously submitted to the stock exchanges. SEBI reviews it and raises observations — essentially a list of clarifications and additional disclosures required before the final prospectus can be issued.
Liaison with SEBI and Stock Exchanges
Navigating SEBI’s review process requires specialised regulatory knowledge. The merchant banker manages all communication with SEBI, responds to observations, makes necessary amendments, and ensures the document meets every regulatory requirement.
Simultaneously, the merchant banker coordinates with BSE and NSE for listing approvals, coordinates with depositories like NSDL and CDSL for share dematerialisation systems, and works with the registrar to the issue for application management.
Pricing the IPO: The Most Critical Decision
Setting the IPO price band is one of the most consequential decisions in the entire process. Set too high, and the IPO undersubscribes, damaging the company’s reputation. Set too low, and the promoters leave money on the table.
The merchant banker arrives at a recommended price band through:
- Comparable company analysis — valuation multiples of listed peers
- Discounted cash flow modelling — intrinsic value based on future earnings
- Precedent transaction analysis — recent IPO pricing in similar sectors
- Investor feedback — from early roadshow conversations
The final price band is a negotiated outcome between the merchant banker’s analysis and the company’s expectations. Experience and market relationships make the difference between accurate and mispriced offerings.
The Roadshow: Marketing the IPO
Before the issue opens for public subscription, the merchant banker organises and manages an extensive investor roadshow. This involves taking the company’s management team to meet institutional investors — mutual funds, insurance companies, foreign portfolio investors, and family offices.
In a typical large Indian IPO, the roadshow covers:
- Multiple Indian cities including Mumbai, Delhi, and Bengaluru
- International financial centres like Singapore, Hong Kong, London, and New York
Management presentations, one-on-one meetings, and group sessions are organised in tight succession over 5 to 10 days. The merchant banker prepares the investor presentation, coaches management on likely questions, and manages the logistics of this intensive schedule.
Feedback from roadshows informs final pricing decisions. If institutional interest is overwhelming, the price band may be set at the upper end. Tepid response may prompt a recalibration.
Book Building and Demand Assessment
Most Indian IPOs use the book building process where investors bid within a price band rather than at a fixed price.
The merchant banker manages the book building — collecting bids from qualified institutional buyers (QIBs), high net worth individuals (HNIs), and retail investors across the subscription period.
In real time, the merchant banker tracks:
- Overall subscription levels
- Demand at each price point within the band
- Category-wise subscription — QIB, HNI, retail separately
- Geographic and investor-type distribution of demand
This data shapes the cut-off price determination at close of subscription.
Post-Issue Responsibilities
The merchant banker’s role does not end when the subscription closes.
Post-issue responsibilities include:
- Coordinating allotment with the registrar
- Managing refunds for unsuccessful applicants
- Ensuring credit of shares to successful allottees’ demat accounts
- Coordinating the listing day with the stock exchanges
- Filing post-issue reports with SEBI within specified timelines
- Supporting any price stabilisation mechanism if a green shoe option was included
The green shoe option allows the merchant banker to stabilise the post-listing price if it falls below the issue price by buying shares from the secondary market using overallotment proceeds.
Underwriting Commitment
In some IPOs, merchant bankers also act as underwriters, committing to subscribe to any portion of the issue that remains unsubscribed. This provides assurance to the issuing company that the funds will be raised regardless of market conditions.
Underwriting is more common in debt issues and government disinvestments. For commercial IPOs, the underwriting commitment depends on negotiation and market conditions.
Why the Merchant Banker’s Reputation Matters
SEBI has consistently emphasised that merchant bankers are gatekeepers of the public issue market. They certify the accuracy of disclosures and vouch for the quality of the issue.
When poor-quality companies list through shoddy disclosures, SEBI investigates the merchant banker. Penalties include suspension of registration, debarment from managing issues, and financial fines.
This accountability structure is what makes top merchant bankers deeply careful about which IPOs they agree to manage. Reputation, built over decades and a portfolio of successful issuances, is their most valuable asset.
Final Thoughts
A successful IPO is rarely a lucky event. It is the result of months of meticulous preparation, regulatory navigation, market intelligence, and execution across dozens of parallel workstreams. The merchant banker orchestrates every piece of this complex puzzle.
For companies going public, choosing the right merchant banker is arguably the most important pre-IPO decision they make. The right banker brings credibility, investor relationships, regulatory fluency, and pricing judgment that cheaper alternatives simply cannot match.
For investors, understanding the merchant banker’s role helps in evaluating IPO quality. A well-managed IPO, backed by reputed merchant bankers with thorough disclosures and credible pricing, starts on a fundamentally stronger footing than one where these elements are compromised.
FAQs
Q. How many merchant bankers can a single IPO have?
Large IPOs often have three to five BRLMs. One is typically designated the lead with primary responsibility.
Q. Does a merchant banker guarantee IPO success?
No. They manage the process but cannot guarantee market reception or post-listing performance.
Q. How is a merchant banker paid for an IPO?
Through a fee that is typically a percentage of the total funds raised, ranging from 0.5% to 2% depending on issue size and complexity.
Q. Can a merchant banker invest in the IPO it manages?
Subject to SEBI restrictions on conflict of interest, merchant bankers must follow specific rules regarding their own participation.
Q. What happens if the DRHP has material misrepresentations?
SEBI can withdraw approval, cancel the IPO, and take enforcement action against both the company and the merchant banker.
Q. Is the merchant banker the same as the underwriter?
Not always. While they can serve both roles, underwriting is a separate commitment that may or may not be part of the merchant banking mandate.
Q. How long does the entire IPO process take with a merchant banker?
From initial mandate to listing, a typical Indian IPO takes 6 to 12 months depending on the company’s readiness and SEBI review timelines.
