The primary market is the segment of the capital market where new securities are issued for the first time by companies, governments, and public sector institutions. The process of issuing securities to the public is complex and involves legal, financial, marketing, and administrative activities. To ensure that the issue is conducted smoothly, transparently, and in compliance with regulations, various intermediaries are appointed. These intermediaries play a crucial role in bridging the gap between the issuer and investors.
Understanding the roles, responsibilities, and importance of each intermediary is very important, as questions are often asked on their functions and regulatory aspects.
Meaning of Intermediaries in the Primary Market
Intermediaries in the primary market are institutions or individuals who assist the issuing company in planning, managing, marketing, allotting, and settling securities. They ensure that the issue complies with SEBI regulations, reaches potential investors, and is completed within the stipulated time.
These intermediaries reduce information asymmetry, enhance investor confidence, and help in efficient capital mobilisation.
Merchant Bankers (Lead Managers)
Merchant bankers are the most important intermediaries in a primary market issue. They are also known as lead managers to the issue. Their role begins at the planning stage and continues till the completion of the issue.
They advise the company on the type of issue, timing of the issue, pricing of securities, and structuring of the offer. Merchant bankers prepare the draft prospectus, coordinate with SEBI for approvals, appoint other intermediaries, and supervise the entire issue process. They also ensure compliance with all legal and regulatory requirements.
For SEBI, merchant bankers act as the main point of contact with the issuing company and are responsible for due diligence.
Underwriters
Underwriters provide a guarantee to the issuing company that a minimum amount of funds will be raised from the issue. If the public does not subscribe fully to the issue, the underwriters are obliged to subscribe to the unsubscribed portion.
This arrangement reduces the risk for the issuing company and increases investor confidence. Underwriters may be banks, financial institutions, or brokerage firms. In return for their services, they receive an underwriting commission.
In many large public issues, underwriting is mandatory as per SEBI guidelines.
Bankers to the Issue
Bankers to the issue are scheduled banks appointed by the issuing company to handle the financial aspects of the issue. Their main responsibility is to collect application money from investors and transfer it to the issuer’s account.
They manage escrow accounts, handle refunds in case of over-subscription or rejection of applications, and provide daily reports on collections. Their role ensures safe handling of investor funds and smooth fund flow during the issue process.
Registrars to the Issue
Registrars play a vital administrative role in a public issue. They process application forms, maintain records of investors, and manage allotment of securities.
Their responsibilities include verifying application data, finalising the basis of allotment in consultation with stock exchanges, dispatching allotment letters or crediting securities in demat form, and processing refunds. They also handle investor grievances related to allotment and refunds.
Registrars ensure accuracy, transparency, and efficiency in the post-issue process.
Brokers to the Issue
Brokers to the issue help in marketing the securities and encouraging investors to subscribe. They act as a link between the issuing company and the investing public.
They distribute application forms, provide information about the issue, and collect applications from investors. Brokers are paid a brokerage commission based on the number of applications procured through them.
Although their role has reduced with the growth of online applications, they still play an important role in reaching retail investors.
Advertising Agencies
Advertising agencies are appointed to design and execute promotional campaigns for the issue. Their objective is to create awareness among investors about the company and its public issue.
They prepare advertisements, brochures, and other publicity material in accordance with SEBI’s advertising guidelines. Proper and ethical advertising helps in attracting investors and building confidence in the issue.
Legal Advisors
Legal advisors assist the issuing company in complying with various legal requirements. They vet the prospectus, agreements, and contracts to ensure that all disclosures are accurate and legally valid.
Their role is crucial in avoiding legal disputes and ensuring that the issue meets statutory obligations under company law and SEBI regulations.
Auditors and Chartered Accountants
Auditors and chartered accountants certify the financial statements and other financial information disclosed in the prospectus. They ensure that the financial data presented is true, fair, and prepared according to accounting standards.
Their certification enhances the credibility of the issue and helps investors make informed decisions.
Depositories and Depository Participants
In the modern capital market, securities are issued mainly in dematerialised form. Depositories such as NSDL and CDSL, along with their depository participants (DPs), facilitate electronic holding and transfer of securities.
They enable credit of securities directly to investors’ demat accounts after allotment, ensuring faster and safer settlement.
Role of SEBI in Regulating Intermediaries
All intermediaries in the primary market are regulated by SEBI. They must be registered with SEBI and comply with prescribed norms and codes of conduct. SEBI monitors their activities to ensure fair practices, transparency, and investor protection.
In case of misconduct or violation, SEBI has the power to impose penalties, suspend registration, or cancel licenses.
Importance of Intermediaries in the Primary Market
Intermediaries play a critical role in the success of a primary market issue. They ensure proper planning, regulatory compliance, efficient fund mobilisation, and investor protection. Without intermediaries, it would be difficult for issuers to access the market and for investors to participate confidently.
Intermediaries are important because banks often act as merchant bankers, underwriters, bankers to the issue, and custodians.
Conclusion
Intermediaries are the backbone of the primary market issuance process. Each intermediary performs a specialised function that collectively ensures a smooth, transparent, and successful issue.