What is an Underwriter in an IPO?

An underwriter in IPO typically acts as a bridge between companies going public and investors who wish to invest in them. Underwriters of IPOs are usually investment banking institutions that extend their services from the initial preparation of an IPO till its final listing on the secondary market.

As of FY26, 77 mainboard IPOs have been issued, raising over INR 85,000 crore, and underwriters played their role behind the scenes. Read this blog to learn its types, key roles and more about underwriters.

Decoding the Meaning of Underwriter in IPO

Before diving into an understanding of the role of underwriters, you must get more clarity on their meaning. Underwriters, i.e. investment banks, work closely with companies that are going public. They ensure to follow the regulatory guidelines of the SEBI for the IPO process.

As an investor, when you choose an IPO and subscribe, it is an underwriter who buys shares from the company and sells them to you if you get the allocation.

They might also act as a risk bearer in case of undersubscription. Suppose a company issues an IPO to raise INR 100 crore but receives bids for only INR 70 crore. Here, the underwriters might buy the remaining INR 30 crore themselves.

An IPO issuing company, depending on the size of the IPO, might hire 1 or multiple underwriters to carry out their IPO process successfully from issuance to listing.

Key Roles and Responsibilities of an Underwriter in IPO

From the evaluation of a company background, abiding by SEBI guidelines, and even after its listing, underwriters play these roles:

1. Company Evaluation

   To determine whether an IPO-issuing company is eligible and to abide by SEBI guidelines, the role of underwriters is to evaluate the company’s financials and other factors. For example, a company must have a net tangible asset of INR 3 crore in the previous 3 years before launching IPOs. Underwriters confirm this with other factors before the issuance.

2. IPO Price Determination

   Another key role of an underwriter in IPO process is to determine the initial price of each share. They determine this by evaluating market data, investor sentiment, etc, and set a price accordingly to attract IPO subscribers.

3. IPO Marketing

   To attract institutional investors, an underwriter in IPO typically leads a ‘roadshow’ and represents it before them as a potential investment. It is to gauge investor interest and adjust share prices. Suppose demand indicates potential funding of INR 950 crore instead of the planned INR 800 crore. Underwriters might advise the company to adjust the target amount.

4. Distribution

   As an individual investor, you are subscribing to an IPO, and so is an institutional investor. Here lies another role of the underwriter in IPO, which is to distribute the shares. Thus, they ensure that an IPO reaches among institutional and retail investors to meet a broader audience target.

5. Monitoring after Listing

   You might think that the role of underwriter in IPO process ends when the IPO is complete and the company is listed. However, their role still extends as they usually monitor the trading pattern in the secondary market and maintain the potential liquidity.

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Different Types of Underwriters in IPOs Explained

After learning the key roles and responsibilities of an underwriter in IPO, you must also learn how many types of underwriters there are for a better understanding:

1. Lead Underwriters

   When a company goes public from private and approaches an investment bank as an underwriter, they approach other investors to gauge the market. Such investors are typically the fund houses, insurance companies, etc, to analyse the demand for the company’s stock. Based on such findings, plus the company’s financials and other factors, the company sets an IPO price.

2. Co-Underwriters

   Companies that issue a larger IPO might need to approach more than just one underwriter. As the name suggests, the co-underwriter works in tandem with the lead underwriter. By working collaboratively, they manage the different aspects of the IPO process to complete it successfully.

3. Syndicate Members

   Syndicate members are also financial institutions and sometimes might act as an underwriter in IPOs. For example, the SEBI guidelines state that an IPO issuing company must secure a minimum of 90% of the issued amount.

If they fail to do so, they might need to refund the application money within 15 days. Hence, syndicate members buy minimum subscription shares at a predefined price from the company to make up such a shortfall.

Conclusion

An underwriter in IPO is a financial institution that handles the IPO process when a company is deciding to go public from private. They ensure that a company is meeting SEBI guidelines, compliance, etc, to determine its eligibility. Underwriters approach large financial organisations to estimate investors’ sentiment to determine the IPO prices, market it and even monitor trading patterns after listing.

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FAQs on the Underwriter in IPO

1. How is an IPO underwriter different from a stockbroker?

Typically, a stockbroker acts as an intermediary between the stock market and the individual investors. With professional guidance, they might help in buying and selling securities. On the other hand, an IPO underwriter acts as an intermediary between an IPO issuing company and investors.

2. How do IPO underwriters make money?

When an IPO issuing company approaches an underwriter, it receives payment for services at a certain percentage of the issue size.

3. Why do IPOs need underwriters?

An underwriter in IPO provides a wide range of services. These include company evaluation, setting IPO price and selling them to investors and more. Also, they bear the risk of undersubscription and even monitor the share performance of the company after listing.

4. How much does it cost to underwrite an IPO?

The SEBI has set a cap on the maximum payable commission to underwriters. As per the SEBI guidelines, the payable commission for an IPO underwriter for shares is up to 2.5% of the entire issue size.