The players in an IPO, and what the bank is actually paid to do
The answer
An IPO has 7 named parties, and only 1 of them works for you: nobody.
The most important is the book running lead manager, an investment bank hired and paid by the company and the selling shareholders. Its job is to prepare the offer, find buyers, set the price and decide who gets shares. Its fee is usually a percentage of the money raised.
Why this costs you money
Most retail investors carry an assumption they have never examined: that somebody in this process has checked whether the price is reasonable, and that if it were absurd the deal would not be allowed to proceed.
Nobody has that job.
- The regulator checks that the disclosure is complete. SEBI says so in every prospectus, and the SEC says the same in the United States. Neither approves the price.
- The exchange checks that listing conditions are met.
- The auditors check the accounts, not the valuation.
- The bank produces the valuation, and is paid more when the valuation is higher.
The specific loss follows from that last line. An investor treats the price band as an expert's estimate of fair value. It is a seller's asking price, prepared by a firm whose fee depends on the sale completing at a good number.
There is a second, smaller loss that costs Indian retail investors real money every year. Large institutions called anchor investors are allotted shares before the issue opens to you, and the list of who they are is published . Almost nobody reads it. It is the single most informative free document in an Indian IPO, and it is available a full day before you have to decide.
How it works
Here is the cast, in the order they appear.
1. The issuer. The company, plus any selling shareholders. They are the client. Their objective is the highest price that can be defended, and a completed sale.
2. The book running lead manager (BRLM). In the United States the same role is called the lead underwriter or bookrunner. The bank does 5 distinct jobs:
- Due diligence. Verifying that the disclosure document is accurate, because the bank carries legal liability if it is not.
- Drafting. Preparing the prospectus with the lawyers.
- Valuation and the price band. Comparing the company to listed peers and proposing a range.
- Distribution. The roadshow, the institutional meetings, and the building of the order book.
- Allocation. Deciding, within the rules, which institutions receive shares.
Large issues have several banks. One or 2 lead, the rest join the syndicate for distribution and fees.
3. The underwriters. An underwriter agrees to buy any unsold shares. In the United States a firm commitment underwriting means the banks buy the whole issue from the company and resell it, so the company's money is certain and the risk sits with the banks. In India, book-built issues work differently, and the underwriting arrangements often do not cover the institutional portion in the same way. Read the word "underwritten" carefully. It does not always mean what it sounds like.
4. The registrar to the issue. A specialist firm that receives every application, checks it, runs the allotment, arranges refunds or unblocking, and instructs the depositories to credit shares. If you ever want to know why you did not receive an allotment, the registrar's website is where you look.
5. The regulator. SEBI in India, the SEC in the United States. It reviews the document and issues comments. It does not vouch for the company or the price.
6. The bankers to the issue. The banks that hold your application money. In India this is the ASBA system, where the money is blocked in your own account and debited only if you receive an allotment.
7. The exchange. Grants listing approval, runs the bidding platform, and lists the shares.
Two more parties appear in specific situations. A stabilising agent operates the over-allotment option, often called a greenshoe, buying shares in the market after listing to support the price for a limited period. And in Indian SME listings, a market maker is required to quote 2-way prices for a period after listing.
What it tells you, and what it does not
The bank's incentives are not hidden and they are not simple.
Pulling in 1 direction: the fee is a percentage of the amount raised, so a higher price and a bigger issue mean a bigger fee.
Pulling the other way: the bank sells to the same 200 institutions on every deal, and it needs them to answer the phone next time. An issue priced so high that its institutional buyers lose money is expensive for the bank's next 5 deals. This is the main structural reason IPOs are often priced a little below what the market will pay on the first day. That gap is sometimes described as money left on the table. It is better understood as a fee paid by the issuer to institutions, for taking the risk of buying before there is a market price.
What this does not tell you is that underpricing is a gift you can collect. The institutions receiving that discount are the ones the bank chooses. Retail allocation in India is set by regulation and lottery, and in the United States it is small and discretionary. The discount exists. Your access to it is a separate question.
What the identity of the bank tells you is limited, and worth stating plainly. A large, well-known bank on the cover does not mean the price is reasonable. It means the issuer could afford one. Every badly performing large IPO you can name had reputable banks on the cover.
The decision rule
Read 3 things on the cover and the first 40 pages of the prospectus, and you will know more than most applicants.
1. Who the lead banks are, and how many. A very large number of lead managers on a modest issue usually means distribution was expected to be difficult.
2. What the issue expenses are. The prospectus states the total cost of the issue and its breakdown. Express it as a percentage of the amount raised. That percentage is what selling the shares cost, and it comes out of the money.
3. Who the anchor investors are. Published before you can apply. Long-term funds anchoring an issue and short-horizon funds anchoring an issue are different facts.
None of these 3 tells you whether to apply. All 3 tell you what kind of transaction you are in.
Try this now
Five minutes. Start with a company that listed in the last 2 years — ideally one you hold or one you applied for.
- Search the company name plus "anchor investor" plus "allocation", or go to the NSE or BSE corporate announcements page for that company and look for the filing made 1 working day before the issue opened. In the United States, the equivalent step is different: open the final prospectus, form 424B4, on the SEC's EDGAR system and read the Underwriting section.
- In the Indian filing, list the 5 largest anchor investors and the amount each received.
- Note the lock-in dates. Indian anchor allocations are locked in, with part released after 30 days and the rest after 90 days from allotment. Write both dates in your calendar.
- Now open the RHP cover page and write down the book running lead managers and the registrar.
- Repeat step 4 for 2 more recent IPOs.
What you should see. Three things.
First, the anchor list is mostly a small number of large institutions, several of which appear again and again across different IPOs. These are the buyers the price was actually negotiated with.
Second, the same handful of banks and registrars appear on most issues. The industry is small. That is worth knowing before you treat a bank's name as an endorsement.
Third, and most usable: the 30-day and 90-day anchor lock-in dates are known supply events on a calendar you can now see. A large block of shares becomes sellable on those dates, and it happens for every Indian IPO, every time.
Three real cases
1. Facebook, May 2012 (United States) — what the syndicate knew, and who they told Facebook listed on 18 May 2012 at $38. During the roadshow, the company revised its own guidance about the effect of mobile usage on revenue. Underwriters' analysts cut their estimates, and that information was communicated to institutional clients while the offer was still being marketed to the public. In December 2012, Morgan Stanley agreed to pay $5 million to settle charges brought by the Massachusetts securities regulator over the handling of that information . Separately, Nasdaq's systems failed on the opening day, and in May 2013 Nasdaq agreed to pay a $10 million penalty to the SEC over the mishandling of the listing. Nothing here was hidden afterwards. All of it was invisible on the day people were deciding whether to apply.
2. The Global Analyst Research Settlement, 28 April 2003 (United States) — why the research and the banking are now separated Ten major investment banks reached a settlement with US regulators totalling about $1.4 billion, over conduct during the technology boom of 1999 and 2000 . The findings included research analysts publishing positive coverage of companies their own banks were taking public, and the allocation of hot IPO shares to executives whose companies the bank wanted as clients. The settlement forced structural separation between research and investment banking, which is why analyst reports now carry pages of disclosure. That separation exists because it was once absent, and the losses fell on the public.
3. Paytm, November 2021 (India) — the bank is paid for the sale, not the outcome One 97 Communications raised about ₹18,300 crore at ₹2,150 per share, with a syndicate of large domestic and international banks. The stock fell more than 27% on its first day of trading, the largest listing-day fall for a major Indian IPO at the time. The issue expenses, including the banks' fees, were disclosed in the prospectus and were paid out of the proceeds. This is not an accusation of wrongdoing. It is the structure working exactly as designed. The banks were paid for completing a sale at a price they helped set, and the outcome after listing was not part of what they were paid for.
The question that resolves it
A novice reads the cover of a prospectus and asks: is this a reputable bank?
An expert asks: who is this bank's client, and what is it paid on?
The answer is the same for every IPO ever done. The client is the seller. The fee is a percentage of what the seller receives. Once that is clear, the price band stops looking like an assessment and starts looking like what it is.
What would make this wrong
If the underwriting process reliably produced fair prices, then IPOs would list close to their issue price on average and stay there. They do not. Across markets, first-day returns are positive on average and often large, which means the offer price is systematically different from the price the market sets within hours.
The honest limits:
Banks do real work, and the due diligence is not decoration. A prospectus is far more reliable than any other document you will read about a private company, precisely because the bank and the directors carry liability for it.
Underpricing is also not universal. Plenty of issues are priced above what the market will pay, and the buyers lose money on day 1. The average conceals both outcomes.
And the claim that a bank's reputation carries no information is too strong. Reputable banks decline mandates and refuse to associate with some issuers. What is wrong is treating the presence of a bank as a substitute for reading the document.
In India
The BRLM. Merchant bankers are registered with SEBI and their obligations are set out in regulation. The lead manager signs a due diligence certificate to SEBI. That certificate is a real legal document with real consequences.
Anchor investors. Up to a defined share of the institutional portion can be allotted to anchor investors 1 working day before the issue opens, at a price set in that process. Anchors face a lock-in, with a portion released after 30 days and the remainder after 90 days. Anchor allocation is discretionary. The list is published.
Minimum subscription. If a public issue does not receive subscription of at least 90% of the offer, the issue is withdrawn and all application money is returned. This is a genuine floor that does not exist in the same form in the United States.
The registrar. A small number of registrars handle most Indian issues. Their websites let you check your allotment status using your application number or PAN, which is the fastest route to an answer on allotment day.
ASBA and UPI. Your money is blocked, not debited. A retail investor applies through the UPI mandate route up to the applicable limit. The money leaves your account only if shares are allotted.
In the United States
Firm commitment underwriting. In the standard US structure, the underwriters buy the shares from the issuer at a discount to the offer price and resell them. The difference is the gross spread, historically around 7% for mid-sized American IPOs and lower for very large ones. It is disclosed on the cover of the prospectus.
Allocation is discretionary. The underwriters decide who receives shares. There is no reserved retail quota and no lottery. Some brokers now offer retail customers access to IPO allocations, but the amounts are small relative to the issue.
The over-allotment option. Underwriters typically have the right to sell up to 15% more shares than the base offer, and to buy shares in the market afterwards to cover that short position. This is the mechanism behind price stabilisation in the days after listing.
Rules on conduct. FINRA rules restrict the allocation of new issues to restricted persons, including brokerage employees and, in defined circumstances, executives of companies whose business the bank is seeking. Those rules exist because of the conduct settled in 2003.
The quiet period. Communications by the company and the syndicate are restricted before and immediately after the offering.
Where they differ, and what that tells you
The divergence is about who decides who gets shares.
In India, regulation takes the decision away from the bank for most of the issue. Retail investors have a reserved quota, and when that quota is oversubscribed the allotment is by lottery. Everybody applying for 1 lot has the same chance as everybody else applying for 1 lot. The bank's discretion is concentrated in the anchor and institutional portions, and the anchor list is published.
In the United States, the bank decides. Allocation is a commercial decision made by the underwriters, and a retail investor's access depends on which broker they use and how much business they do.
What this tells you is where to spend your attention.
An Indian investor cannot improve their odds by being a better customer. The odds are arithmetic and public. What they can do is read the anchor list, which is the only place the discretionary part of the process is disclosed, and treat the 30-day and 90-day lock-in expiries as scheduled events.
An American investor cannot see an anchor list, because there usually is not one. What they can read is the Underwriting section of the final prospectus, which discloses the spread, the over-allotment option and the lock-up agreements. That is where the equivalent information lives.
The habit transfers. The document does not.
Carry this
- The bank works for the seller and is paid on the amount raised.
- Nobody in the process is paid to tell you the price is too high.
- In India the anchor list is published a day before you apply. Read it.