The Role of Merchant Banker
The issuer appoints the Merchant Banker (or Investment Banker) to undertake the issue activity. A Merchant Banker performs multiple functions during the preliminary issue of security. He advises and advocates the issuing firm regarding the regulations for equity issue. He also decides the timing and pricing of the issue so that the issue gets fully subscribed.
The Investment Banker performs the underwriting function for an issue and is specifically called as Underwriter to the Issue. The Investment Banker guarantees a fixed amount to the issuer in exchange of its securities for which it pays an underwriting fee. The issue is underwritten depending on the reputation of the issuer and the environment for new issues in the market. In underwriting, the investment banker runs the risk of undersubscription of issue and has the obligation to purchase the unsubscribed portion as guaranteed in the underwriting issue. So he is careful in selecting the issuer for underwriting and sometimes underwrites the issue in a syndication of Investment Bankers to reduce the risk and also discourage firms with low public image.
The Merchant Banker also performs activities like drafting and design of Offer Documents, Prospectus, statutory advertisements and marketing campaigns, and the memorandum containing salient features of the Prospectus. He also ensures that the issuer complies with stipulated requirements and completes the prescribed formalities with the Stock Exchanges, Registrar of Companies, and the SEBI including finalization of Prospectus and filing. He also performs the activity of distributing the shares through marketing channels.