The Role of Underwriters in Initial Public Offerings (IPOs)

For any private business, deciding to list on the stock exchange and offer its shares to the general public is a big thing. This whole process of listing and selling shares to the public for the first time is called an initial public offering (IPO). During an IPO, many key players play an important role in carrying out the whole process. One such key player is called an underwriter.

An underwriter makes sure that the IPO is successful and guides the company at every step of the process. From determining the appropriate price for the offered shares, to managing investors interest and ensuring all legal requirements are met an underwriter holds important responsibilities.

In a way an underwriter is an intermediary between an IPO company and investors.

In this article, we will explore what underwriters are, what they do and why they are so important in initial public offerings.

• Table of contents

• IPO underwriters – who are they?
• Underwriting – the types
• Mandatory underwriting requirements for IPOs
• Underwriters – roles and responsibilities
• The IPO underwriting process
• Due diligence conducted by underwriters

IPO underwriters – who are they?

Usually, an IPO underwriter is an investment bank or a group of financial institutions that helps a company go public. They act as a mediator between the company and investors. The underwriter buys the shares from the company and then sells them to the public. This helps ensure the company gets the funds it needs while minimising the risk of the IPO failing.

Underwriting – the types

Equity underwriters

Equity underwriters help companies sell shares to the public, mainly during an IPO. When a company wants to go public, it works with investment banks. These banks, through their underwriters, talk to big investors––like mutual funds and insurance companies––to check how many people want to buy the shares. Based on this, they set the share price. Sometimes, underwriters promise to buy a certain number of shares. However, if they can’t sell them all, they may suffer losses.

Insurance underwriters

Insurance underwriters decide whether it is safe to give someone insurance. If the person or institution is deemed to be not too risky, then insurance underwriters approve the policy and set a premium (cost) based on the risk. They also decide the rules for the insurance. Later, if a claim is made, they check if it’s fair and how much should be paid.

Mortgage underwriters

These underwriters check if someone should get a home loan. They look at income, credit score, and the property’s value. They decide if the loan is approved or not. They also help decide the interest rate.

Debt security underwriters

They buy bonds from companies or the government and sell them to other buyers to make a profit, called an underwriting spread. Sometimes, many underwriters work together as a team.

Read Also: How to Invest in an IPO: Step-by-Step Guide

Mandatory underwriting requirements for IPOs

• Every IPO should typically be fully underwritten for 100% of the offer amount, beyond the minimum subscription level. In some cases, companies may choose partial underwriting or even no underwriting, depending on investor demand and regulatory requirements. For example, in India, SEBI regulations allow companies to decide whether they want their IPO to be underwritten or not. However, SME IPOs often require full underwriting to ensure that unsold shares are purchased, preventing the issue from failing.
• Lead managers must underwrite at least 15% of the total issue size using their own funds.
• The issuer, along with lead managers, must appoint SEBI-registered merchant bankers as underwriters.
• Lead managers can also make agreements with nominated investors to buy specific shares if the issue is under-subscribed.
• Before the IPO opens, lead managers must submit proof to SEBI confirming 100% underwriting.
• The proof includes details of all underwriters, nominated investors, and sub-underwriters, along with their share of commitments.
• If any underwriter or nominated investor fails to fulfill their part, the lead manager must cover the shortfall.
• All underwriting and subscription arrangements must be clearly mentioned in the offer documents to ensure transparency.

Read Also: Cut-Off Price in IPO: Meaning, Role & How It Works

Underwriters – roles and responsibilities

• Analyse the company’s past financial performance and future growth projections.
• Review the business model, market position and growth plans.
• Evaluate the management team’s experience and corporate governance standards.
• Prepare and file the Draft Red Herring Prospectus (DRHP) and other documents with SEBI.
• Work with legal teams to ensure all disclosures and securities laws are followed.
• Plan marketing activities like roadshows and investor meetings to attract interest.
• Set the IPO pricing based on investor demand and market trends.
• Manage the book-building process and allocate shares to investors.
• Coordinate with syndicate members to widen the investor base.
• Offer price stabilisation support after listing to reduce volatility.
• Track share trading patterns and help maintain market liquidity.
• Submit regular progress reports to SEBI and other authorities.
• Support post-listing market activity, including market-making when needed.
• Maintain ongoing communication with investors and stakeholders throughout the IPO process.

The IPO underwriting process

Step 1: Choose an investment bank or broker

Companies select underwriters based on their experience, reputation, and ability to attract investors. In India, top investment banks with proven records are preferred.

Step 2: Conduct due diligence and file with SEBI

Underwriters analyse the company’s finances, business model, and growth plans. They prepare documents like the Draft Red Herring Prospectus (DRHP) and ensure SEBI compliance.

Step 3: Price the IPO

Underwriters set a price band by studying market trends, company valuation, and investor interest. The goal is to balance company needs with investor demand.

Step 4: After market stabilisation

After listing, underwriters support the stock by managing price stability and ensuring smooth trading during the early days.

Step 5: Transition to market trading

The stock moves to regular trading patterns. As the stock finds its place in the market, underwriters slowly reduce their support.

Read Also: What is the Process of Selling IPO Shares

Due diligence conducted by underwriters

IPO pricing and valuation

Underwriters use methods like peer comparison, industry trends, and growth forecasts to set a fair price. Different underwriters may apply different approaches.

DRHP preparation

They work with company management to draft the DRHP, ensuring all key information is accurate and meets SEBI regulations.

Connecting issuer and investors

Through roadshows and presentations, underwriters communicate the company’s value to institutional and retail investors.

Backing unsubscribed shares

In hard underwriting, they commit to buying any unsold shares, showing confidence in the IPO and ensuring stability for the issuing company.

Conclusion

IPOs are exciting but complex events. Companies need expert help to navigate this journey. Underwriters play a critical role in making this transition smooth and successful.

FAQs:

How does an underwriter evaluate risk?

Underwriters evaluate risk by studying the company’s financial history, industry position, legal issues and management team.

What are the different types of underwriters?

Here are the types:

• Equity Underwriters
• Insurance Underwriters
• Mortgage Underwriters
• Debt Security Underwriters

What are the benefits of using an underwriter for an initial public offering?

Here are the benefits:

• Reach more investors.
• Set the right price.
• Meet legal requirements.
• Gain credibility.
• Raise funds efficiently.

What are the risks associated with being an underwriter?

Risks of underwriting:

• Unsold shares that they may have to buy themselves.
• Market volatility during the IPO.
• Reputational damage if the IPO fails.
• Legal liability for inaccurate disclosures.

How do underwriters manage the IPO?

The following are the various responsibilities of underwriters:

• Studying the company and its financials.
• Setting the price range.
• Collecting bids from investors.
• Allocating shares and supporting price stability post-listing.