Choosing an SME IPO Merchant Banker: A Founder's Checklist

Of every decision a promoter makes on the road to an SME listing, the choice of merchant banker is the one I would spend the most time on. The merchant banker — formally the Book Running Lead Manager, or BRLM — is not a vendor you hire to file paperwork. They draft your DRHP, run the due diligence, price the issue, build the demand book, underwrite the entire offering and then commit to making a market in your stock for three years after listing. A weak banker can sink an otherwise listable company; a strong one can rescue a marginal one. This is the checklist I run with every promoter before they sign an engagement letter.

For the broader context of how an SME listing comes together, read my complete founder’s guide to the SME IPO. This piece is narrower: how to pick the firm that will carry you through it.

Non-negotiable: a SEBI-registered Category I merchant banker

Start with the licence. Only a merchant banker registered with SEBI as a Category I entity under the SEBI (Merchant Bankers) Regulations, 1992 can act as lead manager to a public issue. Category I is the only category permitted to carry out the full scope — issue management, underwriting, advising and portfolio management. Anyone offering to “lead manage” your IPO without a Category I registration is, at best, a consultant who will sub-contract the actual mandate to a registered banker and clip a fee in between.

Verify the registration number yourself on the SEBI intermediary database. Check that it is current, not suspended, and that the firm has no pending SEBI adjudication orders against it. This is a five-minute check that promoters routinely skip and occasionally regret.

Track record: count the listings, then judge their quality

A banker’s pitch deck will lead with the number of SME IPOs they have managed. The raw count matters — a firm that has closed 25-30 SME issues knows the BSE SME and NSE Emerge desks, the registrars, the printers and the exchange officials by name. But the count is the easy part. Dig into quality:

Subscription levels. Were their recent issues comfortably subscribed, or did they scrape past the 90% minimum? A banker whose last five issues were subscribed 3x to 40x has a distribution engine that works. One whose issues limped to 1.1x on the back of friends-and-family applications has a problem you do not want to inherit.

Post-listing performance. Pull the price charts of their last ten listings six months and twelve months out. If most are trading below issue price, that tells you the banker systematically over-prices to maximise the promoter’s dilution-day proceeds and then walks away. The companies that trade well after listing — or at least hold issue price — signal a banker who prices responsibly and supports the counter. Don’t confuse this with the grey-market froth I unpack in my explainer on grey market premium; what you want is durable post-listing strength, not a one-day pop.

Underwriting capacity: 100% is mandatory, so balance-sheet matters

This is the structural feature that distinguishes an SME IPO from a mainboard one. Under SEBI ICDR Chapter IX, an SME issue must be 100% underwritten, and at least 15% of the issue size must be underwritten by the merchant banker on its own books. There is no “best-efforts” option: if the public does not subscribe, the banker (and the syndicate it assembles) is contractually on the hook to buy the shortfall.

That changes how you evaluate a banker. A firm underwriting a ₹25 crore issue is committing real capital and capital adequacy to the mandate. Ask the hard questions: what is their net worth, what is their underwriting track record, and have they ever actually had to honour a devolvement (an under-subscription that forced them to take up shares)? A banker who has weathered a devolved issue and survived has the balance sheet you want standing behind your offering. A thinly-capitalised firm promising to underwrite a large issue is a risk — if the book wobbles, you need them to hold, not fold.

Market-making: the three-year commitment that outlives the IPO

Here is the obligation most first-time promoters underestimate. For an SME listing, the merchant banker must ensure market-making in the scrip for a minimum of three years from the date of listing. The market maker has to provide two-way quotes (buy and sell) for a minimum proportion of the trading day, maintaining an inventory (typically funded by a carve-out of around 5% of the issue set aside for the market maker) so that early investors are not stranded in an illiquid stock.

Liquidity on SME platforms is thin by nature — lot sizes are large (often ₹1 lakh-plus per lot) and the investor base is narrow. A serious market maker keeps a tradeable spread and a real inventory; a lazy one posts token quotes at absurd spreads and effectively abandons the counter. Ask the banker to show you the market-making spreads and inventory they have maintained on their last few listings. If they cannot, or will not, that is a tell. The cost mechanics of this three-year commitment are part of what I break down in my piece on SME IPO cost and timeline.

Distribution network: who actually buys the issue

Underwriting is the backstop; distribution is the engine. The question that decides whether your issue is subscribed 1.1x or 10x is simple: whose money does the banker bring?

A strong SME banker maintains relationships across three pools — HNIs and family offices who anchor the non-institutional book, a retail distribution network of sub-brokers and authorised persons who push the issue to individual investors, and increasingly a set of category III AIFs and PMS desks that take SME exposure. Ask concretely: how many HNI relationships will they activate, how large is their retail reach, and do they have anchor investors lined up? A banker who answers with specifics has a real book; one who answers with platitudes is hoping the market does the work for them.

Due-diligence rigour: the banker who pushes back is the one to hire

The DRHP is signed by the merchant banker, and the banker carries statutory liability for its accuracy. A good BRLM therefore runs genuine due diligence — they will dig into your related-party transactions, your contingent liabilities, your GST and income-tax compliance history, your title to key assets and the cleanliness of your cap table. Counter-intuitively, the banker who interrogates you hardest is usually the better hire. The one who waves everything through is either sloppy or plans to externalise the risk onto you.

The diligence also drives the document itself. If you want to understand how thorough this gets, see my section-by-section guide to drafting the DRHP— the risk factors, the MD&A and the related-party disclosures are exactly where a rigorous banker earns the fee. Much of the cleanup they will demand should ideally have been done well in advance, which is the whole argument of my note on pre-IPO structuring in the 18 months before filing.

Fee structure: what you pay, and what is negotiable

SME IPO merchant banker fees are typically structured as a fixed management fee plus a percentage of the issue size. For SME issues in the ₹15-50 crore range, the all-in lead-manager fee commonly lands somewhere between 4% and 8% of the issue size, though this varies widely with issue size, complexity and the banker’s appetite for the mandate. On top of the lead manager’s own fee sit underwriting commission, market-making fees for the three-year commitment, and a set of pass-through costs — registrar, legal counsel, printing, exchange processing and listing fees, advertising, and the mandatory peer-review and due-diligence costs.

What is negotiable: the fixed management fee, the percentage component, and the milestone-linked payment schedule (insist on tying a meaningful slice of the fee to actual listing, not just to filing). What is far less negotiable: the statutory and exchange costs, which are fixed by the regulator and the bourses. Be wary of a banker who heavily discounts the headline fee — the economics have to come from somewhere, and a deeply-discounted mandate often means a thin market-making commitment or a rushed diligence. Whether you list on BSE SME or NSE Emerge also feeds into the cost stack, since the two platforms differ on processing fees and market-maker norms.

Conflicts of interest to surface up front

Ask the banker to disclose conflicts before you sign. Common ones: is the firm’s associate also acting as the market maker, the underwriter and the registrar — concentrating every role (and every fee) within one group? Does the banker have a stake in companies competing with yours? Is there a related-party relationship between the banker and your proposed anchor investors? None of these is automatically disqualifying, but all of them should be on the table and documented in the engagement letter, not discovered during SEBI scrutiny.

The red flags — walk away if you see these

Over-promising on valuation. The single most common bad-banker behaviour. A firm that opens the pitch by dangling an aggressive valuation or P/E multiple to win the mandate is selling you the dilution-day number, not a sustainable listing. Aggressive pricing maximises the banker’s percentage fee and the promoter’s day-one proceeds, then leaves the stock to sink below issue price. A credible banker grounds the price in comparable listings and earnings, and is willing to talk you downfrom an unrealistic number.

Weak post-listing support. If the banker treats listing day as the finish line, the three-year market-making obligation becomes a box-ticking exercise. Probe how they have supported past issues after listing — research coverage, investor outreach, genuine two-way quotes.

Vagueness on the book. A banker who cannot name the investor pools they will tap, or who deflects when you ask about subscription history, does not have the distribution to back the underwriting.

Fee structures with no skin in the game. Heavy front-loading of fees to the filing stage, with little tied to a successful listing, misaligns the banker from the outcome you actually care about.

The concrete checklist

Before you sign an engagement letter, confirm every one of these in writing:

1. SEBI Category I merchant banker registration — number verified, current, no pending adjudication. 2. Track record — number of SME listings, with subscription levels and 6/12-month post-listing price charts for the last ten. 3. Underwriting — net worth disclosed, 100% underwriting confirmed, devolvement history discussed. 4. Market-making — three-year commitment in writing, historical spreads and inventory shown. 5. Distribution — named HNI, retail and anchor pools, with numbers. 6. Due diligence — a detailed information-request list, not a rubber stamp. 7. Fees — itemised lead-manager fee, underwriting commission, market-making fee, and all pass-throughs, with payments tied to listing milestones. 8. Conflicts — disclosed and documented. 9. Valuation — grounded in comparables, with the banker willing to argue you down rather than up.

Bottom line

The merchant banker is the most consequential hire of your entire IPO, and the cheapest or the most flattering pitch is rarely the right one. Verify the Category I licence, interrogate the track record on subscription and post-listing performance, satisfy yourself on underwriting capacity and the three-year market-making commitment, understand exactly whose money fills the book, reward rigorous diligence, and walk away from anyone over-promising on valuation. Get this hire right and the rest of the process — DRHP, pricing, listing, aftermarket — rests on solid ground. Get it wrong, and no amount of preparation elsewhere will save the listing.