Strategic Management and Corporate Finance · Raising of Funds from Equity and Procedural Aspects - Public Funding

Role of Intermediaries and Regulators in a Public Issue

Updated 11 October 2026 · Fact-checked

In a public issue, regulators set and enforce the rules, and intermediaries carry out the work. SEBI regulates the market, stock exchanges give listing permission, and merchant bankers manage the issue. Registrars handle applications and allotment, bankers collect money, and underwriters back the issue. You answer by naming each party and its function.

Understand Role of Intermediaries and Regulators

A company that raises money from the public cannot do it alone. It needs people who know the law, price the issue, reach investors, collect money and record the allotment. These people are called intermediaries. Over them sit regulators, who make the rules and check that everyone follows them.

The main regulator is SEBI. It frames regulations for issue of capital and disclosures, registers and supervises intermediaries, reviews offer documents, and can inspect, investigate and penalise. Its aim is investor protection and orderly markets. The Registrar of Companies is the other regulator: it registers the prospectus and handles company law filings.

Stock exchanges are both market and gatekeeper. Under section 40(1) of the Companies Act, 2013, every company making a public offer must, before the offer, apply to one or more recognised stock exchanges and obtain permission for the securities to be dealt with there. If the prospectus states that such an application has been made, it must also name the exchange or exchanges (section 40(2)). The exchange also gives in-principle approval, helps in the basis of allotment and supervises listing compliance afterwards.

Intermediaries each have a defined job:

Merchant banker (lead manager): manages the issue end to end. It does due diligence, helps prepare the offer document, advises on pricing and timing, coordinates the other intermediaries, runs marketing and files documents with SEBI. It must be registered with SEBI.
Registrar to an issue: receives applications, checks and processes them, finalises the basis of allotment with the exchange, sends allotment advice, refund and credit of shares to demat accounts, and keeps records.
Bankers to an issue: collect application money, hold it in the designated account, and make refunds. This ties in with section 40(3), which says application money must be kept in a separate account in a scheduled bank. It may be used only for adjustment against allotment where the exchange permission is in place, or for repayment within the time SEBI specifies if securities cannot be allotted.
Underwriters: agree to subscribe to the shares not taken up by the public, up to the amount underwritten. They give the company assurance that the money will come in.
Others: legal advisers, auditors, depositories, credit rating agencies for debt, monitoring agencies and advertising agencies.

In the exam, link each party to a stage: before the issue (merchant banker, legal advisers), during the issue (bankers, registrar, syndicate members), and after the issue (registrar, exchange, depositories, monitoring agency).

Key rules to remember

Exchange permission before public offer: Public offer → apply to recognised stock exchange(s) first → obtain permission → then offer (Section 40(1)); Mandatory for every company making a public offer. The prospectus must name the exchange(s) where the application has been made (Section 40(2)).
Application money rule: Application money → separate account in a scheduled bank; use only for (a) adjustment against allotment, or (b) refund within SEBI-specified time (Section 40(3)); Use (a) only where securities are permitted to be dealt with on the exchange named in the prospectus.
Waiver is void: Any condition making an applicant waive Section 40 compliance is void (Section 40(4)); Investors cannot be made to give up these protections.
Penalty for default under Section 40: Company: fine ₹5,00,000 to ₹50,00,000. Officer in default: fine ₹50,000 to ₹3,00,000 (Section 40(5)); Imprisonment for officers was removed with effect from 21-12-2020.
Application form and abridged prospectus: No application form issued unless accompanied by an abridged prospectus (Section 33(1)); penalty ₹50,000 for each default (Section 33(3)); Exceptions: bona fide invitation to enter into an underwriting agreement, or securities not offered to the public. A full prospectus copy must be furnished on request before the closing of the subscription list (Section 33(2)).
Who may issue to the public: Public company: public offer, private placement, rights or bonus issue. Private company: rights or bonus issue, or private placement only (Section 23); A private company cannot make a public offer.

How to solve Role of Intermediaries and Regulators questions

Questions on this topic ask you to describe roles, or to apply them to a company's facts. Use the same structure each time.

1Identify what is asked: a role of one party, a comparison of parties, or a fact-based case.
2List the parties involved in the facts and tag each as regulator or intermediary.
3State each party's function in one or two crisp lines, tied to a stage of the issue.
4Quote the legal provision that applies, such as Section 40 or Section 33, with its exact condition.
5Apply the provision to the facts: was the exchange permission obtained, was the money kept in a separate account, did the form carry an abridged prospectus.
6Conclude clearly: compliant or not, the consequence, and the penalty if relevant.
7Add a practical point such as the company secretary's role in coordinating the intermediaries and filings.

Quickest way: Stage-wise party map

When to use it: When you must write a descriptive answer fast on roles of many parties.

Draw three columns: before issue, during issue, after issue.
Place SEBI and the exchange across all three as regulators.
Put merchant banker and legal adviser under before; bankers, registrar and underwriter under during; registrar, depository and exchange under after.
Write one verb per party: manages, collects, allots, backs, lists.
Close with the Section 40 and Section 33 rules that protect investors.

Common mistakes in Role of Intermediaries and Regulators

Saying the merchant banker only prices the issue.
Students remember pricing advice as the headline role.
Fix: Describe the full role: due diligence, offer document, pricing advice, marketing, coordination of intermediaries and filing with SEBI.
Confusing registrar to an issue with the Registrar of Companies.
Both are called registrar.
Fix: The registrar to an issue is a private SEBI-registered intermediary handling applications and allotment. The Registrar of Companies is a government officer under Section 396 who registers companies and documents.
Mixing up underwriters and bankers to an issue.
Both deal with money in the issue.
Fix: Bankers collect and refund application money. Underwriters commit to take up unsubscribed shares. One handles cash flow, the other handles risk of under-subscription.
Stating that listing permission can be sought after the offer opens.
Students think of listing as a post-issue event.
Fix: Section 40(1) requires the application and permission before making the public offer. Listing itself happens after allotment.
Quoting old penalties including imprisonment for Section 40 default.
Older notes still show imprisonment.
Fix: The current text gives fines only: ₹5 lakh to ₹50 lakh for the company and ₹50,000 to ₹3 lakh for each officer in default.
Claiming a private company can make a public offer.
Students mix up the routes in Section 23.
Fix: Only a public company can issue to the public through a prospectus. A private company is limited to rights, bonus or private placement.

Worked examples

Example 1

Sundaram Infra Ltd, a public company, plans an IPO. It opens the issue and collects application money in its normal current account. It applied to no stock exchange before opening. Discuss the compliance position and the consequences.

Show the solution

Provision: Section 40(1) requires every company making a public offer to apply to a recognised stock exchange and obtain permission before the offer.
Facts: Sundaram applied to no exchange, so the first requirement is breached.
Provision: Section 40(3) requires application money to be kept in a separate bank account in a scheduled bank, used only for adjustment against allotment (where permission exists) or for refund within the time specified by SEBI.
Facts: Money sits in the normal current account, so the second requirement is also breached.
Consequence: Under Section 40(5), the company faces a fine of ₹5,00,000 to ₹50,00,000, and each officer in default faces a fine of ₹50,000 to ₹3,00,000.
Practical point: The company should stop the issue, move the money to a proper account and refund applicants if permission is not obtained.

Answer: Sundaram has breached Section 40(1) and Section 40(3). The company is liable to a fine of ₹5 lakh to ₹50 lakh and each officer in default to a fine of ₹50,000 to ₹3 lakh. Any term making applicants waive these protections would be void under Section 40(4).

Example 2

Explain the role of the merchant banker, registrar to an issue, bankers to an issue and underwriters in a public issue, and the regulatory role of SEBI.

Show the solution

Open with a line: the regulator sets the rules, the intermediaries execute the issue.
Merchant banker: SEBI-registered lead manager; conducts due diligence, prepares offer document, advises on pricing and timing, coordinates other parties and files documents with SEBI.
Registrar to an issue: receives and processes applications, finalises basis of allotment with the exchange, dispatches refunds and credits shares to demat accounts, maintains records.
Bankers to an issue: collect application money in a designated separate account, as Section 40(3) requires, and make refunds if the issue fails or applications are rejected.
Underwriters: agree to subscribe to unsubscribed shares up to the amount underwritten, giving assurance of funds.
SEBI: frames issue and disclosure regulations, registers and supervises intermediaries, reviews offer documents, inspects, investigates and penalises violations to protect investors.
Add the exchange: gives permission to deal in the securities (Section 40(1)) and supervises listing compliance.

Answer: The merchant banker manages the issue, the registrar handles applications and allotment, bankers handle money collection and refund, and underwriters back the issue against under-subscription. SEBI regulates all of them and the process, while the stock exchange gives the permission for dealing in the securities.

Exam tips

Write role answers as a short list with one bold party name and one clear function each; examiners reward coverage.
Always cite Section 40 when discussing exchanges or application money, and give the exact penalty range if default is in the facts.
Do not confuse the registrar to an issue with the Registrar of Companies; state the difference in one line if both appear.
In case questions, follow provision, analysis, conclusion, and end with a practical step for the company secretary.
Use the official wording of the Act; do not quote the older imprisonment penalty for Section 40.

Practice questions from Raising of Funds from Equity and Procedural Aspects - Public Funding

Role of Intermediaries and Regulators in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Role of Intermediaries and Regulators: frequently asked questions

What is the role of a merchant banker in a public issue?

The merchant banker, also called the lead manager, manages the whole issue. It does due diligence, helps prepare the offer document, advises on pricing and timing, coordinates other intermediaries and files documents with SEBI. It must be registered with SEBI.

What does underwriting of a public issue mean?

Underwriting is an agreement under which the underwriter promises to subscribe to the securities not taken up by the public, up to the amount underwritten. It gives the company assurance that the issue will be covered.

What do the registrar to an issue and bankers to an issue do?

The registrar processes applications, finalises the basis of allotment, sends refunds and credits shares to demat accounts. Bankers to an issue collect application money in a designated account and make refunds. Section 40(3) requires the money to be held in a separate account in a scheduled bank.

Why must a company apply to a stock exchange before a public offer?

Section 40(1) of the Companies Act, 2013 requires every company making a public offer to apply to a recognised stock exchange and obtain permission for the securities to be dealt with there before making the offer. The prospectus must name the exchange where the application has been made.