Banking · Merchant Banking Services
InfraTech Ltd plans to raise Rs 2,500 Crore through an Initial Public Offering (IPO). The appointed Merchant Bank, Capital Zenith Advisors, commits to underwrite the entire issue at 90% of the offer price. Which statement accurately describes the role of the Merchant Bank in this scenario, differentiating it from a Commercial Bank, and explains the primary risk taken by the Merchant Bank in the underwriting commitment?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The Merchant Bank acts as a financial advisor and intermediary managing the issue and underwriting, taking the primary risk of having to subscribe to the unsubscribed shares if the public issue fails to receive full subscription.✓
- 2The Merchant Bank's main role is to offer retail banking services to investors, and the underwriting risk involves the possibility of the final offer price being higher than market consensus.
- 3The Merchant Bank acts primarily as a custodian of public deposits and a provider of working capital loans, and the underwriting risk is limited to advisory fees.
- 4The Merchant Bank acts as a direct regulatory authority on behalf of SEBI, and its risk is completely mitigated by the minimum statutory guarantee provided by the central government.
Correct answer
The Merchant Bank acts as a financial advisor and intermediary managing the issue and underwriting, taking the primary risk of having to subscribe to the unsubscribed shares if the public issue fails to receive full subscription.
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