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Basics of stock market 4: Company filing for the IPO process


Now you understood why a company wants to get listed in the stock market or the exchange. At this stage, your only with a registered company running an amazing business. You know to get listed is a dream come true but have no idea how to get listed. Whom should you ask and what are the processes to get listed in the stock market? Let's dive deep into the process of a company filing to get listed in the exchanges.

A company makes an offer (generally in crores) to the people through exchanges, this is called Initial Public Offer or IPO. We often get IPO alerts if you have a trading account, or you must have read in newspapers that a company is coming up with IPO. Remember, when they say about IPO, it means the company is gearing up to be listed in the exchanges- the stock market.

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Merchant Banker

The first and foremost step would be to appoint a merchant banker. Merchant bankers are also called Book Running Lead Manager (BRLM) or simply Lead Manager (LM). Their role is to assist the company with various aspects of the IPO process. In case it’s a large company, they usually hire 2 merchant bankers.

Regulations for merchant Banker

merchant banker

Merchant bankers are required for dealing in international markets for procuring financial help and incorporating business and trading in the international market. The SEBI or Securities and Exchange Board of India is the regulatory authority for Merchant Banking in India. The law which regulates the activities of the Merchant Bank in India is the SEBI (Merchant Bankers) Regulations 1992.

Banking Institutions performing merchant banking activities are also required to follow the requirements laid down in the prudential exposure norms prescribed by the Reserve Bank of India.

Examples of Merchant Bankers in India

  • Public Sector: SBI Capital Markets, Punjab National bank, IFCI Financial Services, Bank of Maharashtra

  • Private Sector: ICICI Securities, Axis Bank, Bajaj Capital, Tata Capital Markets, Kotak Mahindra Capital Company, Reliance Securities, Yes Bank

  • Foreign Merchant Banker: Goldman Sachs (India) Securities, Morgan Stanley India, Barclays Securities (India), Bank of America, Citigroup Global Markets India.

These are the qualities a company see while selecting a merchant banker:

  • The reputation of the Bank: Is the bank a reputed bank in the country, has it been running for a long time, does the public have a good opinion about the bank.

  • Quality of Research: This is very important, as this determines how strong the bank is. The quality of research determines how strong and qualified the bank is for future operations.

  • Industry expertise: This relates to the industry the company is in as well as the bank is in. The more experienced (years in the industry) creates confidence in the company.

  • Distribution: Does the company has influence over Domestic Institutional Investors to issue securities. And, to large individual investors as well.

  • Past relationship with the bank: If the company has a prior relationship relating to its financial or operational activities, it shows a strong interest in choosing the bank.


Underwriting is a service offered by the merchant banker whereby they guarantee payment in case of financial loss or damage and accept the financial risk for liability arising from such guarantee. They raise the investment capital on behalf of the company. The merchant banker underwrites the transaction, which means they have taken on the risk of distribution of the securities (shares).

There are 4 agreements where the merchant bank takes in order to sell the shares through the IPO.

  • Firm Commitment: Here the bank purchases the whole offer and resells the share to the investing public in IPO. There is a firm commitment by the bank that a certain amount of money will be raised through the IPO. The bank takes a risk here that if the whole offer is not sold out, the bank itself would have to buy the remaining offer.

  • Best Effort Agreement: Here the bank does not purchase the offer but puts in the effort to sell the shares to the investing public. The bank here does not take any risk of selling the entire offer. It only sells the securities (shares) on behalf of the company.

  • Syndicate of Bankers: Here, instead of one there will be multiple merchant bankers. The main banker will be called lead book-running manager and the rest will be book-running managers. The risk will also be shared. These banks will again form strategic alliances with other banks to sell a part of the IPO.

  • All or none agreement: Here the bank comes into an agreement that, if all the offer is sold, then only the banks will act as merchant bankers and the offer will be valid. If in any case, the offer is not sold, the whole IPO will be canceled.

Underwriters make their income from the price difference (called "underwriting spread") between the price they pay the issuer (company) and what they collect from investors (IPO) or from broker-dealers who buy portions of the offering.