UNDERWRITING OF SECURITIES IN INDIA

SUBMISSION IN THE SUBJECT OF

CORPORATE FINANCE LAW

BY

Vilakshan Saxena

BA0130076
 DECLARATION

I Vilakshan Saxena, Registrar Number BA0130076, hereby declare that this project work
entitled “UNDERWRITING OF SECURITIES IN INDIA” has been originally carried out by
me under the guidance and supervision of Mr. M L Shankar Kaarmukilan, Associate
Professor of Law, Tamil Nadu National Law School, Tiruchirappalli - 620 009. This work
has not been submitted either in whole or in part of any Degree / Diploma in this Institution
or any other Institution/University.

Place: Tiruchirappalli

Date: 29/04/2017 (-----------------------------------)

I
 ACKNOWLEGEMENT

I take this opportunity to express my profound gratitude and deep regards to my guides for
their exemplary guidance, monitoring and constant encouragement throughout the course of
this thesis. The blessing, help and guidance given by them, time to time shall carry me a long
way in the journey of life on which I am about to embark.

I also take this opportunity to express a deep sense of gratitude to Mr. Mr. M L Shankar
Kaarmukilan, for her cordial support, valuable information and guidance, which helped me
sin completing this task through various stages.

I am obliged to my classmates, for the valuable information provided by them. I am grateful

for their cooperation during the period of my assignment.

Last but not least, I thank almighty, my parents, sister and friends for their constant
encouragement without which this assignment would not be possible. This project is
dedicated to my dear friend Harshit Sharma whom I miss the most.

II
 TABLE OF CONTENTS

I. INDEX OF AUTHORITIES
II. LIST OF ABBRIVIATIONS

1. INTRODUCTION……………………………...………………………………………….1
a. Statement Of Problem………………………………………………………………………….5
b. Scope, Objectives And Significance………………………………………………………….5
c. Research Questions…………………………………………………………...............5

2. CHAPTER – I ……………………………………………………………………….........6
a. Role Of Financial Institutions In Underwriting………………………………………..6

3. CHAPTER –II ………………………………………………………………………….....9

a. Role Of Securities And Exchange Board Of India In Underwriting……………….........9

4. CONCLUSION…………………………………………………………………………..13

5. BIBLIOGRAPHY……………………………………………………………................14

III
 INDEX OF AUTHORITIES

STATUTES

1. Capital Issues (Control) Act, 1947

2. The Companies Act, 1956
3. The Companies Act, 2013

REGULATIONS

1. Securities And Exchange Board Of India (Underwriters) Regulations, 1993

2. Securities And Exchange Board Of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009
3. Securities And Exchange Board Of India (Merchant Bankers) Regulations, 1992
4. Securities And Exchange Board Of India (Underwriters)(Amendment) Regulations,
2006

CASE LAWS

1. Naini Gopal Lahiri Vs. State of Uttar Pradesh; (1965) 35 Com Cases 30 (SC)
2. Pioner Co Vs. Kaithal Cotton & General Mills (1970) 40 Comp Cases 562

IV
 LIST OF ABBRIVIATIONS

Securities And Exchange Board Of India………………………………………....………SEBI

Volume……………………………………………………………………………………...Vol

Company ………………………………………………………………………………....Comp

Supreme court……………………………………………………………………………….SC

Page…………………………………………………………………………………………..Pg

Regulation…………………………………………………………………………………..Reg

Issue of Capital and Disclosure Requirements …………………………………………..ICDR

V
 INTRODUCTION

Underwriting is one of the most fascinating concepts in the field of corporate finance. As per
the Securities and Exchange Board of India (Underwriters) Regulations, 1993
“underwriting” means an agreement with or without conditions to subscribe to the securities
of a body corporate when the existing shareholders of such body corporate or the public do
not subscribe to the securities offered to them.1 Underwriting of securities in corporate
finance means an obligation, arising out of an Underwriting agreement, to subscribe, buy,
procure the securities offered by the company. To explain it in the simplest terms, it is an
agreement entered by a company with a financial agency, in order to ensure that the public
will subscribe for the entire issue of shares or debentures made by the company. C.W.
Grestenberg has defined it to mean an agreement entered into before the shares are brought
before the public that in the event of public not taking up the whole of them the underwriter
will take an allotment of such part of the shares as the public has not applied for.2

The concept of underwritings though present in India for a considerable time, gained
prominence only in the recent times. The first instance of underwritings in India came with
the participation of British securities managing agencies and houses and subsequently Indian
markets adopted their structures and many of the big players such as Tata’s, Thapars,
Poddars, Birla’s became the prominent Indian managing houses.3 Only in the year 1919 first
firms undertook the underwriting works and subsequently in the year 1936, The Indian
Companies act made it compulsory for the issuers to include in the prospectus the names and
details of the underwriters, their commission, contract etc. This was the first act that
addressed the market of underwriters in India however during that time due to the presence of
the big managing houses it was not taken to be such different task that it shall be addressed
through a proper legislation and was rather considered the part of the law relating to public
issue and raising of finance. Accordingly after independence the Capital Issues (Control) Act,
19474 was passed that gave somewhat of a prototype of the provisions relating to the
underwritings that will be seen in the Companies Act, 19565.

1
Securities And Exchange Board Of India (Underwriters) Regulations, 1993, Reg. 2 (fa)
2
C.W. Gerstenberg,“The Underwriting Of Securities By Syndicates”, Trust Companies; Vol. X (1910)
3
Kuchal, S.C, The Industrial Economy of India, Chaitanya Publishing, 1959.
4
Capital Issues (Control) Act, 1947, Act No. 29 of 1947
5
The Companies Act, 1956, Act No.1 of 1956

1
Jurisprudentially speaking the underwriting was introduced in Indian corporate jurisprudence
as an insurance against the inadequate subscription of the shares.6 As per the initial
understanding of Underwriting it was considered as an agreement to insure the issuer against
the unsubscribed shares of the issues i.e. ones that are not subscribed by the public. 7 The
major reason behind such understanding was that it eventually lead to the successful issue of
securities and it completes the targeted amount of the finances the issuer intends to raise, of
course in return of some consideration. But the catch is in the fact that whether or not the
ultimate objective is that it completes is raising of finance by the successful subscription to
the securities. And accordingly based on this rationale the court in Pioner Co Vs. Kaithal
Cotton & General Mills8 established the nature of the underwriting agreement as the not
being a mere guarantee but also an application of shares which are not subscribed by the
public and held that a company may allot the shares in terms of the contract without further
application of shares as per the prospectus. The very fact that such subscription is governed
by the terms of the underwriting contract makes it a tool raising of part of finance intended to
be raised by the issuer which is guaranteed by him.9

Rule 13 sub rule (6) of the Companies (Prospectus and Allotment of Securities) Rules, 201410
establishes the provisions relating to the payment of commission to any person in connection
with the subscription to its securities subject to the prescribed condition i.e. SEBI rules on the
underwriters and the underwriting agreement signed between the company and the
intermediary. Sub clause (d) makes it necessary to for the company to disclose the name,
number of securities to be underwritten, copy of the underwriting contract, and rate and
amount of the commission payable to the underwriter; in the prospectus of the company
while issuing securities.11 During the process of procuring necessary funds, the company,
issuing the securities, enter into an agreement with a financial intermediary who is called an
underwriter who in return of its service receives a certain amount called the “Underwriting
commission.” The financial services intermediaries in underwritings are majorly the national
level financial institutions like UTI or commercial banks, merchants Banks, or the stock
exchange brokers. The role of the financial intermediary is very important in the underwriting

6
Palmer: Company Precedents, Pg 175, (R.A.K. Wright & R. Buchanan Dunlop eds), 17 th Edition; Part I, as
cited in, A Ramiya: Guide to the Companies Act, page 754,18 th edition, 2015, Volume 1.
7
Naini Gopal Lahiri Vs. State of Uttar Pradesh; (1965) 35 Com Cases 30 (SC)
8
(1970) 40 Comp Cases 562
9
Avatar Singh, Company Law , Pg 185, 16 th Edition; 2015
10
Companies (Prospectus and Allotment of Securities) Rules, 2014, Rule 13(6)
11
AishMGhrana, Dematerialisation, Refund And Commission,(Apr. 28, 2017, 21:29)
https://aishmghrana.me/2014/05/15/dematerialisation-refund-and-commission/#more-1912

2
and subsequently an aggressive due diligence is done while appointing one. The company
mostly prefers the experienced, stable and reputed underwriter in the market who has a large
number of investor base so as to provide for the requisite subscription of shares in the event
of taking up the whole of the offered capital. Intermediary takes great precaution in respect of
signing of the underwriting agreement and considers their own resources along with the
marketing strategy for the issue and mostly they involve the stock brokers for such marketing
and the entire process is based on the viability of the offer/issue/project for which the public
issue is made.

There are many types of underwritings which is available. Being presumptive of the fact that
underwriting is a form of insurance is wrong and it is a major component in the corporate
finance tools. The most prominent form of underwriting is the Syndicate underwriting in
which two or more agencies or underwriters jointly underwrite an issue of securities. 12 This is
mostly carried out in case of heavy risk involved in the issue or when a single underwriter is
financially incapable or lacks resources to handle such underwriting alone. Mostly it covers
two kinds of agreements, one which is between underwriter and issuing company and the
agreement amongst the underwriters so as to clearly define the liability of each in respect of
the underwriting taken by them.13 However it differs from the joint underwriting in which
two an issue of a firm is taken by two joint intermediaries so as to share the benefit and
profits from such Underwriting. One another type of underwriting is the “Sub-underwriting”
which is when the main underwriter sub-contracts the underwriting to another intermediary
so as to divide the risk undertaking and in return of some commission. This helps the
intermediary in dealing with unpopular issues.14

The most widely recognised form of underwriting is the firm underwriting where the
intermediary subscribes the securities irrespective of whether it will be offered for the issue
or not. They take a block of securities as the normal subscribers to the security and also take
their role as the underwriters for such issue.15 This mostly is a show of confidence in the issue
and to advertise the stability of the security to be subscribed by the public. It is mostly an

12
Business.gov.in, Underwriting, (Apr. 28, 2017, 21:29)
http://www.archive.india.gov.in/business/growing_business/underwriting.php
13
Dr S. Gurusamy, Financial Services, Pg 285, 2nd Ed, 2015.
14
Ibid 13
15
Ibid 12

3
ought right purchase of securities in which the underwriter is to give the preference over the
general public.16

However as we intend to further analyse the relationship of Underwriting and corporate

finance and the issues prevailing in the Underwriting of securities regime in India it stands
necessary to understand the Indian Underwriting market. The first form is a simple offer for
sale method which is also known as the “Underwritten offering”17. Under this an underwriter
sells the issue to another investors and if he fails to do so he may keep the same as per the
underwriting agreement. In this process the company raises finance from the private source
like merchant bankers, issue houses etc. and then after such raising it issues the securities for
the public subscription and which is sold at a vale below the par. Normally in this form the
lead underwriter appoints the broker for the arrangement of sub-underwriting company then
prepares the statement in lieu of prospectus as per section 70 (1) and files it with Registrar of
companies three days before the allotment of shares.18 Another type of the Variant of
underwriting is the “Bought deal underwriting” or “Bought-out-deals”. It is type of
underwriting where the brokerage firm acts as principle. It is an arrangement where the entire
equity is bought in full or lots, with the intention of loading-off later in the market.19 The
underwriter risks its own capital to purchase all of the securities to be issued. This type of
underwriting variant is mostly preferred by the small and medium companies due as its
cheaper than raising funds from the public issue and time saving process and this makes the
nature of process to be fund based activity for the merchant bankers. Also the involvement of
merchant bankers and other financial institutions raise the credibility bar of the issue hence
given handsome returns and gains to both offeror and intermediary.20

The other most prominent variant is the private placement which also the most common. The
issuers offer securities directly to the potential investors and underwriters commit to purchase
securities than remain unsubscribed mostly for a certain period of time. Mostly the term used
in this context is “Soft underwriting” as it includes a commitment to subscribe even, though

16
Investing Answers, Underwriters, (Apr.28, 2017, 21:44) http://www.investinganswers.com/financial-
dictionary/insurance/underwriter-873
17
Underwritten Offering Definition, Financial Dictionary.thefreedictionary.com, http://financial-
dictionary.thefreedictionary.com/Underwritten+offering
18
Brian Coyle, Equity Finance: Debt Equity Markets, Revised Edition, 2002
19
Money control, Bought-Deal Underwriting,(Apr. 28, 2017, 21:52),
http://www.moneycontrol.com/glossary/stocks/bought-deal-underwriting_3227.html
20
Ze’-ev D. Eiger, and Anna T. Pinedo, Frequently Asked Question about Bought Deals and Block Trades,
(Apr. 28, 2017, 21:57), https://media2.mofo.com/documents/faqs-bought-deals-block-trades.pdf

4
with respect to limited instances. Such issues are dealt with the ICDR regulations, 200921 and
the Securities and Exchanges Board of India (Underwriters) Regulations, 1993.22

Hence after making a thorough analysis of the concept of underwriting one can safely
conclude that it stands as an integral part of the law of corporate finance but also provides for
the adequate funds for the issuer and enables the company to raise the necessary capital funds
within the reasonable and agreed time.

STATEMENT OF PROBLEM

The present research paper embraces the fact that the though underwriting regulations have
been effective the restrictive definitions, Absence of institutional based regulations, slow
paced capital market, lack of specialised intuitions are the prominent issues relating to
underwritings in India. Financial institutions are facing a limited restriction to their
participation in India and subsequently the need of reforms and restructuring of market is
required.

SCOPE, OBJECTIVES AND SIGNIFICANCE:

The scope of the study would include the in depth analysis of the different regulations and
acts in respect of underwriting of securities in India with both legal and institutional impact
of such regulations along with a comparative analysis with other jurisdictions. The objective
of the study to understand the structure and process of underwriting of securities in India in
India and to subsequently find probable solutions to the prevailing issues to it.

RESEARCH QUESTIONS

The researcher embraces the following as its primary research questions:-

1. What is the role of financial institutions in underwriting of securities and what are the
issues they face?
2. What is role of SEBI and how does it address the issues faced by the underwriting
firms in India?

21
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
22
Anchal Dhir and Monal Mukherjee, Bar & Bench, The Viewpoint – Underwriting in Equity Capital Issuances
in India, (Apr. 28, 2017, 21:57), https://barandbench.com/viewpoint-underwriting-equity-capital-issuances-
india/

5
 CHAPTER – I

ROLE OF FINANCIAL INSTITUTIONS IN UNDERWRITING

Many financial institutions and entities act as the intermediaries or to as per the SEBI
(Underwriters) Rules, 1993, the registered intermediaries for the process of underwriting in
India. As per these rules the underwriting activities can only be undertaken by the entity
registered with the SEBI either as underwriter or as the merchant banker or stock broker. 23
The regulations states that, along with other requirements, a minimum net worth of rupees 20
lakh is required for an entity to qualify as the underwriter and his obligation cannot go
beyond twenty times its net worth.24 The SEBI may additionally require the information
under rule 5 and may take in consideration all factors enumerated under Rule 6 of the SEBI
regulations.25

First dealing with the merchant banks, they play an important role in the underwriting of
securities. The issuer may hire the merchant bank for the process of underwriting and
accordingly merchant bank determines the number of stocks to be issued, the price at which
the stock will be issued and the timing of the release of the new stock. From paper work to
the marketing of the new stock, most of the work relating to the underwriting is taken care by
the merchant bank. If the issue is large than the lead merchant bank may form a syndicate
underwriting and subsequently co-ordinate with the other underwriters.26

Issues backed by well-known merchant banks generally receive higher premium from the
public. Mostly the Large corporations undertake the underwriting of securities through
merchant banking due to its diverse services that includes election of institutional and broker
underwriters for syndicating arrangements, obtaining approvals from the stock exchanges,
arranging stock clearances and listing of securities, drafting of prospectus etc. As per the
Regulation 3 sub rule 2 (a) category I, II, III Merchant banks are allowed to indulge in
underwriting services.27 As per the regulation 22 the lead merchant bank is required to
accept minimum 5% of the total underwriting commitment or 25 lakh rupees whichever is

23
SEBI (Underwriters) Regulations, 1993, Reg. 3 (1)
24
SEBI (Underwriters) Regulations, 1993, Reg. 7
25
SEBI (Underwriters) Regulations, 1993, Reg. 5 & 6
26
Dr S. Gurusamy, Financial Services, Pg 190, 2nd Ed, 2015
27
Securities And Exchange Board Of India (Merchant Bankers) Regulations, 1992, Reg. 3(2a)

6
less. They are required to submit to the board of the underwriting contract they have entered
into within 15 days of date of entering into such transaction.28

The merchant banks while undertaking underwriting commitments shall take there that they
shall not overexpose themselves i.e. the liability shall not be way too high that they may not
be able to fulfil their underwriting commitments. The merchant bank shall incorporate the
declaration in the offer document stating that the underwriter’s assets are adequate to meet
their underwriting obligations. It is the duty of the lead merchant bank to make sure that the
issue is fully subscribed and if there is any lack of information regarding the subscription
figures the issue shall be kept open for the required number of days. And they shall in case of
under subscribed issues, furnish information to the board in the format specified in Schedule
XVII.29

There are at least 135 registered merchant banks with SEBI in India. Some of the most
prominent merchant banks are SEBI capital market Ltd, Punjab National Bank, Karur Vyasa
Bank ltd, ICICI Securities Ltd, TATA capital Markets Ltd, Reliance Securities Ltd etc.

In case of the stock brokers, the role is similar to the merchant bank, only it is more restricted
to the basic functions of an underwriter rather than providing for the varied services like a
merchant bank. The primary role of an underwriter is to purchase securities from the issuer
and resell then to investors. It takes all the risk of selling all the securities offered for
subscription and acts as an intermediary between issuer and investor, giving away an efficient
of capital.30 The stock brokers put primary emphasis on the short term prospects of the
issuing company as they cannot afford to block large amount of money for long periods of
time.

However there has been a practise of stuffing which is taken by the intermediaries in
underwriting. This is mostly done by the stock brokers, when an intermediary underwrites an
issue and simultaneously represents investor in the same issue, the investor might end up
paying a higher issue price and intermediary may make false statement or false statement to
sell the issue. This is done so as to shift their potential loss arising out of an unsuccessful

28
Securities And Exchange Board Of India (Merchant Bankers) Regulations, 1992, Reg. 22
29
Money Matters ,Merchant bankers | Definition | Services offered | Categories, (Apr. 28, 2017, 21:57),
http://accountlearning.com/merchant-bankers-definition-services-offered-categories/
30
UK Essays, Introduction to Underwriting, (Apr. 28, 2017, 21:57),
https://www.ukessays.com/essays/finance/role-of-underwriters-and-merchant-bankers.php

7
 31
underwriting to the client. The conduct of an underwriter is an important task and as per
the SEBI (underwriters) Regulations, 1993 every underwriter has to at all times to abide with
high standards of dignity, integrity and fairness and also refrain from misrepresenting
services that he is capable of performing for the issuer or regarding his underwriting
commitment. He shall not derive any direct or indirect benefit from the underwriting issue
other than underwriting commission. The maximum obligation that an underwriter can have
under an underwriting agreement shall not exceed 20 times his net worth. Underwriters have
to subscribe for securities under the agreement within 45 days of the receipt of intimation
from the issuers. 32

31
Stewart, M. Conflicts of Interest Among Market Intermediaries, U.S. Securities and Exchange Commission
International Institute Presentation, http://www.sec.gov/about/offices/oia/oia_market/conflict.pdf
32
Management Of Financial Services, Issue Management: Intermediaries, Regulations And SEBI Guidelines,
(Apr. 28, 2017, 21:57)http://www.psnacet.edu.in/courses/MBA/Financial%20services/13.pdf

8
 CHAPTER – II

ROLE OF SECURITIES AND EXCHANGE BOARD OF INDIA IN UNDERWRITING

The role of SEBI has been that of the prominence in underwriting of securities in India. Not
only has through regulations, but by making continuous favourable changes to them SEBI has
fulfilled the growing needs of the underwriting market in India. The most important role of
SEBI is in respect of the certification and overseeing of underwriters in the market. SEBI
continuously reviews complaints regarding underwriters and subsequently revoke their
certification to act as one under the Underwriters regulations. To understand the significance
of SEBI it is of utmost importance that we make a brief review of the regulations relating to
underwriters. Before we move to analyse the role of SEBI, we need to understand as to why
there was a need of established regulations in respect of Underwriters in India. The main
reason for such rules was to give opportunity to various institutions and stock brokers to
undertake the role as underwriters as initially only the banks and reputed entities of the stock
market undertook the task of Underwriting in India33 and subsequently The SEBI
(underwriters) rules 1993 were enacted which made it mandatory for every underwriter to be
registered and certified by the SEBI. Rule 3(2) also provided for an exemption to the certified
merchant bank and stock brokers under the SEBI Merchant Bankers Regulations, 1992 and
Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992
to obtain a certificate under Underwriter rules.

To obtain certification as the registered intermediary/underwriter rule 4, 6 and 7 comes into

play as per which the underwriter shall enter into a valid agreement with the body corporate
on whose behalf he is acting as underwriter and the said agreement other things may define
the allocation of duties and responsibilities between him and such body corporate. 34

While considering application under these rules the most important conditions that SEBI
takes into consideration are that the applicant has a past substantial experience relating to
underwriting, infrastructure and manpower, fulfils capital adequacy requirements under
regulation 7 etc. Capital adequacy is one of the most important requirements under the SEBI
rules as per which the net worth of the applicant underwriter shall not be less than Twenty

33
Dhawal S, Businessmanagmentideas.com, Underwriting: Meaning, Need and SEBI Guidelines, (Apr. 28,
2017, 21:57) http://www.businessmanagementideas.com/financial-management/capital-issues/underwriting-
meaning-need-and-sebi-guidelines/4148
34
SEBI (Underwriters) Regulations, 1993, Reg. 4 (1)

9
Lakh rupees.35 The capital adequacy requirement in case of stock brokers is given by the
specific stock exchange of which he is a member and the merchant bankers have to fulfil the
requirements of capital adequacy as per the Securities and Exchange Board of India
(Merchant Banker) Regulations 1992. However a lead merchant banker has to mandatorily
subscribe to minimum 5% of the issue or 2.5 lakh whichever is less and they cannot subscribe
to more than 15% of any public issue.36

SEBI has however increased the net worth of the celling limit for both merchant banker and
stockbrokers have been increased. In case of merchant bankers the minimum net worth has
gone up to 5 crore rupees and in case of stock brokers the stock exchanges such as Bombay
Stock Exchange and National Stock Exchange have increased it to 50 lakhs and 2 cores
respectively.37 The main reason behind the increase was to secure the issuers and the
subscribers and to increase the commitment capabilities of the underwriters. This has led to
the creation of a healthy securities market.

The other most important role that SEBI undertakes other than the regulation of the
intermediaries, is the conducting enquiries based on the code of conduct of the underwriters.
Regulation 13 of the SEBI rules , 1993 states that the underwriter shall be abide by the code
of conduct enumerated in Schedule III of the rules. Similar to the director’s duties under
company law, Underwriters shall make all the efforts to protect the interest of the clients; it
shall avoid any conflict of interest and make adequate disclosures. This is important as role of
an underwriter is important to avoid insider trading as it contains all the information
regarding the issue and securities. There shall be an adequate mechanism to avoid any
conflict of interest and fraud on the part of the underwriter.

SEBI reserves with itself the power to make inspections and conduct disciplinary
proceedings. As per Regulation 19, SEBI may appoint one or two persons for the inspection
of the books of account and other record documents, or whether the provisions of Regulations
are being complied with or not. The inspection can be taken in the suo motu manner hence
establishing SEBI as a watchgurad on the underwriters. SEBI Provides for a notice before the
initiation of the inspections and then further proceed to conduct it however in the event of

35
Kannapersonal.com, Capital Market of India - Role of SEBI Registered Intermediaries – Underwriters, (Apr.
28, 2017, 21:57), http://kannanpersonal.com/content/stock/intermediary/underwriters.html
36
Securities and Exchange Board of India (Merchant Banker) Regulations 1992, Reg. 22
37
Hindu business line, SEBI raises minimum capital requirements for brokers, Dec.19, 2012
http://www.thehindubusinessline.com/markets/sebi-raises-minimum-capital-requirements-for-
brokers/article4217897.ece

10
SEBI being satisfied that it is in interest of public and investors, they may conduct such
proceedings without giving notice.

It becomes evident to discuss the role of the Vallabh Bhansali committee38 on underwriting
reforms that eventually resulted in the SEBI (underwriters)(amendment) regulations,200639.
It is necessary for the fact that these reforms led to the better protection of the investors and
allowed for the entry of the new entities in the market. The committee realised the fact that
the regulations need to be reformed in order to match the growing securities market in India
and to address the challenges arising out of globalization of the market. The committee
recognised that the definition of underwriting, unreasonably low capital adequacy
requirement, computation of net worth, absence of slab limits on the underwriting
obligations, devolvement subscription, fees issues were the core one’s that need to be
addressed.

Taking the first issue of restrictive definition the committee identified that from the origins
itself the task of underwriting has been restricted to the merchant banks and traditional body
corporates and the same was done in the definition itself, not only this the definition was
restricted underwriting only to the “subscription to securities” The committee recommended
that it shall include the terms subscribe/procure subscription as in reality underwriter need not
always subscribe to securities and may do so through third party. In case of Capital Adequacy
requirements it was obvious that it should be increased. Increasing this bar would help in
securing the issuer from any non-compliance done by the underwriter and save the issuer
from losses arising out of diverting from the commitment of the on the part of the
underwriter. Not only this, a financially stable underwriter raises the market credibility of the
Issue and leads to better subscription returns. This also lets only healthy underwriters to stay
in the market creating stability and secure regime. Subsequently the committee recommended
the bar to be increased to minimum 100 lakhs. Also when the minimum capital advocacy is
increased the need to reduce the limit on underwriting obligations also arises as the current
limit of maximum 20 times of the net worth was too high. Though it shall be pointed out that
an underwriter with a higher net worth will be more efficient in arranging financing however
due to the diverse nature of the underwriters it was a slab rate was recommended that was
linked with the net worth formula suggested by the committee to keep the characterization at

38
Shri Vallabh Bhansali, Report Of The Review Committee On SEBI (Underwriters) Rules And Regulations,
1993, October 2002 , http://www.sebi.gov.in/reports/reports/oct-2002/underwriters-committee-
report_13220.html
39
SEBI (Underwriters)(Amendment) Regulations, 2006.

11
a better par. There were many other recommendations regarding the code of conduct,
subscription in case of devolvement that further addressed the issues of non-flexibility of the
rules in respect of underwriters.

However the major changes now that are needed in underwriting of securities in India are the
institution specific regulations regarding the underwriting. One such issue is the conflict of
interest in respect of underwriting by commercial banks where commercial lending and
underwriting are taken simultaneously by the bank. It has been argued that it would lead to
arising of the incentive of the banks to underwrite securities for its poor quality borrowers
and use the interest earned for the payment of these loans. As the underwriter can be any
entity who fulfils the conditions under the SEBI (underwriters), 1993, many commercial
banks such as Punjab national banks have been indulged in underwriting of securities and
commercial lending hence they take the informational role of financial intermediaries as
banks that uncover information during the loan period indicative of the poor quality of their
borrowers have an incentive later as underwriters to misrepresent this quality to the capital
markets and thereby help them issue securities which would be used in part to repay the bank
loans.40

Another important aspect that one shall take in consideration is the insider trading related
activities carried on by the underwriters. This kind of conflict arises mostly in the case of the
merchant banks and brokerage firms where almost every activity is taken by the underwriters
regarding the public issue. A specific set of guidelines regarding the disclosure and
confidentiality shall be formulated, which currently is largely dependent on the underwriter
agreement.

After making a scorched analysis of the role of SEBI in underwriting of securities it can be
safely concluded that SEBI plays an important role to regulate the underwriting market and
keeps a dynamic pace with the changing trends of the markets. Though the bigger picture is
of the Public issue and the investor protection, it can none the less be denied that
underwriting is an important element of the securities market in India.

40
George Kanatas and Jianping Qi, Underwriting by Commercial Banks: Incentive Conflicts, Scope Economies,
and Project Quality Source: Journal of Money, Credit and Banking, Vol. 30, No. 1 (Feb., 1998), pp. 119-133,
Ohio State University Press

12
 CONCLUSION

After making a detailed analysis of the overall structure of the underwriting of securities in
India one can safely conclude that it has been successful in incorporating the modifications
necessary to address changing trends and challenges in the market. As we have already seen
that legal issues relating to the SEBI regulations have been aptly addressed by the Vallabh
Bhansali committee on underwriting reforms, the next step that shall be taken is in regard to
the institution based regulations for underwriters, where different financial institutions and
entities are regulated by the specific rules related to them. Also when we compare the Indian
underwriting markets with other jurisdictions like that of USA it becomes really important to
address some issues like SEBI regulations do not allow the underwriters to act as the initial
purchasers. They do not enjoy the privilege to undertake hard underwritten transactions even
though such transactions would lead to decreased risks and increased profits. Absence of such
flexibility hampers the capability of the underwriters to secure more benefits out of the
markets and is not a long lasting model, which will eventually be helpful for the market as the
whole.

Hence it can be aptly said that as already the Indian market has addressed legal loopholes in
the underwriting regulations and SEBI has been an important institution in governing and
overseeing the underwriting market in India the next step forward shall be institutional based
legal regulations for better governing the growing and ever changing market of the
underwriters in India.

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 BIBLIOGRAPHY

PRIMARY SOURCES

ACTS

1. Capital Issues (Control) Act, 1947, Act No. 29 of 1947

2. The Companies Act, 1956, Act No.1 of 1956
3. Companies Act, 2013

REGULATIONS
1. Securities And Exchange Board Of India (Underwriters) Regulations, 1993
2. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
3. SEBI (Underwriters) Regulations, 1993
4. Securities And Exchange Board Of India (Merchant Bankers) Regulations
5. SEBI (Underwriters)(Amendment) Regulations, 2006

RULES

1. Companies (Prospectus and Allotment of Securities) Rules, 2014

REPORTS

1. Shri Vallabh Bhansali, Report Of The Review Committee On Sebi (Underwriters)

Rules And Regulations, 1993, October 2002 ,
http://www.sebi.gov.in/reports/reports/oct-2002/underwriters-committee-
report_13220.html

CASES

1. Naini Gopal Lahiri Vs. State of Uttar Pradesh; (1965) 35 Com Cases 30 (SC)
2. Pioner Co Vs. Kaithal Cotton & General Mills (1970) 40 Comp Cases 562

DICTIONARY

1. Underwritten Offering Definition, Financial Dictionary.thefreedictionary.com,

http://financial-dictionary.thefreedictionary.com/Underwritten+offering

SECONDARY SOURCES

BOOKS

1. Kuchal, S.C, The Industrial Economy of India, Chaitanya Publishing, 1959.

2. Palmer: Company Precedents, (R.A.K. Wright & R. Buchanan Dunlop eds), 17th
Edition; Part I,
3. A Ramiya: Guide to the Companies Act, ,18th edition, 2015, Volume 1
4. Dr S. Gurusamy, Financial Services, 2nd Ed, 2015.

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 5. Brian Coyle, Equity Finance: Debt Equity Markets, Revised Edition, 2002
6. Avatar Singh, Company Law , Pg 185, 16th Edition; 2015

ARTILCES
1. C.W. Gerstenberg,“The Underwriting Of Securities By Syndicates”, Trust Companies;
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2. Ze’-ev D. Eiger, and Anna T. Pinedo, Frequently Asked Question about Bought Deals
and Block Trades, (Apr. 28, 2017, 21:57), https://media2.mofo.com/documents/faqs-
bought-deals-block-trades.pdf
3. Stewart, M. Conflicts of Interest Among Market Intermediaries, U.S. Securities and
Exchange Commission International Institute Presentation,
http://www.sec.gov/about/offices/oia/oia_market/conflict.pdf
4. George Kanatas and Jianping Qi, Underwriting by Commercial Banks: Incentive
Conflicts, Scope Economies, and Project Quality Source: Journal of Money, Credit
and Banking, Vol. 30, No. 1 (Feb., 1998), pp. 119-133, Ohio State University Press

NEWS ARTICLE

1. Hindu business line, SEBI raises minimum capital requirements for brokers, Dec.19,
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requirements-for-brokers/article4217897.ece

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1. AishMGhrana, Dematerialisation, Refund And Commission,(Apr. 28, 2017, 21:29)

https://aishmghrana.me/2014/05/15/dematerialisation-refund-and-commission/#more-
1912

2. Business.gov.in, Underwriting, (Apr. 28, 2017, 21:29)

http://www.archive.india.gov.in/business/growing_business/underwriting.php
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28, 2017, 21:57), http://accountlearning.com/merchant-bankers-definition-services-
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And SEBI Guidelines, (Apr. 28, 2017,
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10. Kannapersonal.com, Capital Market of India - Role of SEBI Registered Intermediaries

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