Who is a Syndicate Member?

A syndicate member refers to a financial institution participating in the initial public offering (IPO) process. Their main function is to assist organisations that want to go public and sell their shares. Moreover, the purpose of syndicate members is to enable the smooth running of an IPO. They are vital to determining the share price and managing the overall process. Furthermore, there are different types of syndicate members with different responsibilities. In this blog, you will understand the meaning of syndicate members, their types, roles, and risks.

Key Highlights

• Syndicate members help companies go public by overseeing and distributing shares. They ensure the IPO operates smoothly and have a significant impact on determining the stock price.

• There are different types of syndicate members such as lead managers, co-managers, and book-running lead managers. Each has specific tasks in the IPO procedure.

• Syndicate members can perform tasks including underwriting securities, selling shares to investors, establishing the initial price, and ensuring that all laws are followed.

• Syndicate members may be forced to purchase the remaining shares if the IPO is undersubscribed, leading to possible losses. This situation is known as syndication risk.

Syndicate Member Meaning

A syndicate member is referred to as an individual or company who belongs to a group created for a particular financial objective. The tasks involve selling stocks and bonds, providing loans, and funding large-scale projects like constructing buildings or establishing real estate among others.

Syndicates are short-term groups of banks or other financial institutions with functions that assist in making complex financial transactions easier. A syndicate’s primary purpose is to share the risks and duties related to these transactions and assist companies in completing them. 

Types of Syndicate Member

There are different types of syndicate members who have specific roles in ensuring the success of a financial transaction. Let’s discuss each role in brief:

1. Lead Manager

The lead manager or syndicate manager is responsible for distributing and promoting the IPO. This position involves working closely with the issuer to settle all details on the new issue and engage in negotiations to reach a mutually acceptable agreement. However, the syndicate manager could split the gains with other banking institutions that support him/her in promoting an IPO to potential buyers.

2. Co-Manager 

Co-managers are the investment banks who assist in promoting an IPO.  However, their role is less significant compared to that of lead managers. They can have input or give recommendations during the entire process but they don’t contain strong authority over the structuring or pricing process of an IPO.

3. Book-Running Lead Manager (BRLM) 

The role of a book-running lead manager requires one to perform the responsibilities of a lead manager and that of a co-manager. This involves establishing financial records, giving information on the availability of shares for bidding, and organising a syndicate for extra support during the process itself.

What is the Role of a Syndicate Member?

Syndicate members in IPO play an important role in underwriting securities. Let’s discuss their role in brief:

• To sell new stocks or bonds, a company works with a syndicate. They fix to pay for some of the new securities at an agreed price. This enables the business to find requisite funds while transferring risk on securities selling.

• The members of syndicates also take care of distributing those securities to various investors. They rely on their knowledge and connections to reach many people thereby distributing the risk.

• They carefully examine both the issuer and the securities on their appeal and whether they follow all rules. The syndicate will help determine initial pricing which may be adjusted to reflect market dynamics.

• They make certain that all legal and regulatory requirements are satisfied, then decide what method is to be used to distribute securities among investors. The company may still receive assistance from them even after the issues are sold.

What is Syndication Risk?

Despite the continuous attempts from the syndicate members towards an initial public offering, it may still be undersubscribed. This means that no public has purchased all the shares. In such cases, they will buy leftover shares at their expense. At times, they might sell the same shares later with losses involved. This risk is referred to as syndication risk.

For instance, if XYZ Limited intends to raise Rs. 1,000 crores and the public only subscribes to Rs. 800 crores worth of it, then syndicate members must cover this shortfall by purchasing the remaining Rs. 200 crores worth of shares themselves. After public listing, these are then resold on the stock exchange.

The problem of syndication risk can be significant for syndicate members. When other investors do not invest, they have no option but to buy the entire quantity left unreserved before reselling it.  This is because paying for all shares at once will result in financial troubles.

Conclusion

In the IPO process, syndicate members are really important. They help companies go public by managing and selling shares. They are of different types like lead managers, co-managers, and book-running lead managers who contribute to the success of an IPO. They also facilitate the distribution and pricing of securities. However, in return, they share the risks associated with it such as syndication risk. Furthermore, if an IPO is undersubscribed, syndicate members themselves may have to buy any remaining shares. Thus, incurring losses financially. Therefore, these roles and risks must be understood to facilitate the IPO process.

FAQs on Syndicate Members