Underwriters and Underwriting Agreements

When a public company wants to invite the public for subscription of its shares, it has to look
upon certain things. Sometimes, a company may be very much new and it is not known to the
general public or even to the commercial community. So, it may sometimes enter into contracts
with investment banks or other institutions that will help the company in subscription of its
shares. In such cases, a company enters into different agreements and one of the most important
agreements in this regard is underwriting agreements.

Underwriting agreement provides that a company will offers its shares to the general public and
the underwriters will assist the company in subscription of its shares. There might be different
ways by which the underwriters will assist the company in subscription of its shares. The
underwriting may take different forms. However, in all such ways the underwriting is used for
selling shares or debentures and it is used for inviting subscription from the general public. The
underwriter would assist the company because of the agreement because the underwriter is given
the commission for his services. Whenever a public company wants to raise money by giving its
shares or debentures or in other words company is going for public offering of its securities it
would seek the help of securities market professionals and this professional would help out that
what is the form which this company should adopt for underwriting.

There are three main forms of underwriting.

The first form is the firm commitment underwriting. In this form, the underwriter ensures that all
of the securities of the company would be sold. So, the underwriter makes an underwriting group
which will acquire shares or securities of the company which were unsold. So, this underwriting
group agrees to acquire all of the securities of the company, which are not acquired or subscribed
by the general public, on the agreed price. Generally, this price would be less than the price
which was offered to the general public. This is a secure way but it is very costly because the
price of the securities which is given or on which the securities are given to the underwriters is
less than the public offering price. On the other hand, it will be secure for the company because it
will be the responsibility of the underwriter that all of the securities are taken by underwriting
group or anyone else.

Another form of underwriting is best efforts underwriting. In this form, the underwriter is merely
the agent of the company who is making all of his efforts for the subscription of securities of the
company. However, the underwriter will not be responsible if some of the securities of the
company are not taken by anyone. Generally this form will be used where the company is very
much new and it is not known to the public. In such case, the underwriter would not be willing to
take the risk because the company is very much new and the general public might not be willing
to get the securities of the company. So, the underwriter does not take very much or big risk in
ensuring the sale of these securities.
Another form of underwriting is all or none. In this particular form, the underwriter has to sell
the entire portion which has been issued by the company. If all of such amount of shares or
securities has not been sold by the underwriter and then the deal would be avoided and then the
underwriter will not get any commission for the services.

Another form of underwriting is known as stand by underwriting. In this particular form, the
underwriter will first of all try to sell the securities of the company and if some securities have
been left which are not subscribed by the public then these securities and these shares will be
taken by the underwriter. The underwriter is responsible to get those shares and securities which
are not subscribed by the public on public offering price.

These main forms of underwriting are used mainly in order to facilitate initial public offering of
the company where the public has been invited to get securities of a particular company.