Underwriting Underwriting is a guarantee given by the underwriters to take up whole or part of the issue of securities not subscribed by the

public. It is a marketing technique whereby corporate enterprises are able to sell their securities to the public and thereby achieve success in the public issue. The underwriter works for commission called as underwriter commission. According to Gerstenberg, "Underwriting is an agreement entered into before the shares are brought before the public that in event of the public not taking the whole the underwriter will take an allotment of such shares as public has not applied for. Types of underwriting (1)Firmunderwriting. Generally, underwriters agree to buy such number of shares or debentures which are not to be taken up by the public but sometimes, the underwriting agreement provides that the underwriters will purchase certain shares (as greed upon) themselves. Such an agreement of outright purchase of securities with the underwriters is called Firm Underwriting. This liability is in addition to the shares not taken up by the public. Such an agreement creates confidence in minds of the public. (ii)Sub-Underwriting. In case of large issue, an underwriter does not wish to carry the whole risk on his shoulders; he may enter into the contract with other underwriters to share the risk. This contract entered into between the main underwriter and the other underwrites is called Sub-underwriting and the other underwriters are called Subunderwriters. The company is nowhere in the picture. Sub-underwriters are offered a commission slightly below the underwriting commission. (iii)Syndicateunderwriting. This is an underwriting agreement between he issuing company and 2-3 or more firms of underwriters to underwriters a large issue. They agree with the company to share the joint responsibility in an agreed ratio. Some-times, these underwriters to the contract form a new consortium or syndicate. Such a system is called Syndicate Underwriting. It is very popular in Germany. Underwriting Agencies

became popular in the Indian capital market only recently. Underwriting. Some important firms of stock brokers are busy in underwriting the issues. in India. and Investment Trust of India Ltd. Underwriting. (vi) Industrial Credit and Investment Corporation of India. commercial banks have also participated in the race of underwriting and played an important role in this field.Underwriting is as an important type of financial service. started in the Indian capital market only after the world war. Ltd. with the setting up of the Industrial Credit and Investment Corporation of India (ICICI). with IDBI being one of the largest. which had been underwriting the issues of companies managed mostly by their managing agents. on a substantial scale. Now Managing Agency system has been abolished in April 1970 but these firms are still working. started in the Indian capital market only Weaving Co. like Industrial Investment Trusts of Bombay. The start of underwriting business has been with the start of the corporation in 1955 and it played a significant role in the field of underwritings.. Devkaran nanji Investment co. (iv) Life Insurance Corporation.. Birds Investment Ltd. Ltd. with the setting up of the Investment corporation of India Ltd. (iii) Indian Commercial Banks. (ii) Investment Companies and Trusts. . Underwriting gained momentum and popularity after January 1955. They have been working at present as a group underwriters. (vii) It is Industrial now the development Bank of largest institutional underwriter India. The Tatas started the first underwriting business in India in 1937. Not only there were there few underwriting firms operating in India. but also the underwriting done was also less. Since independence. M/s Dalal and Co. It made its beginning in 1912 when M/s. In the late thirties.. M/s Batiliwala and Karni.. (i) Private Firms. (v) Industrial Finance Corporation. The underwriting operation was included in the objects of the Corporation but it took interest in the field on underwriting only after 1957. managing agents organised a number of investment banks and trusts.Batliwala and Karni underwrote the shares of the Central India Weaving Co. Siddons and Gough. These are M/s Place. Later. and M/s Wright and Co. other development financial institutions such as Life Insurance Corporation of India. on a substantial scale. Calcutta. M/s Kothari and Co. Industrial Development Bank of India (IDBI) and Unit Trust of India started taking an active part in the underwriting of new issues.

into liquidation. In the absence an underwriting agreement. good underwriters increase the goodwill of the company. a company may face a situation where even minimum subscription is not received and. (ix) State Financial Corporations. An underwriter of repute would go into the soundness of the plan put forward by the company before entering into an agreement and suggest changes wherever necessary.(viii) It is also Unit one of the Trust four of largest India. Now a-days almost 95 % issues are underwritten and mostly by institutional underwriters. underwriters maintain working arrangement with other underwriters . Almost in every state. Thus. (iii) Increase in Goodwill of the Company. (iv) Geographical Dispersion of Securities. In case of an existing company. there is a financial corporation of the lines of Industrial Finance Corporation of India. The progress had been very slow but now it is very smooth. These corporations have also shown interest in underwriting. underwriting agreement assures of the required funds within a reasonable or agreed time. not subscribed by public. it can go ahead with its plan confidently. enabling the company to aviod certain pitfalls. Advantages (i) Assurance of Adequate Finance: Underwriting is a guarantee given buy the underwriters to take up the whole issue or remaining shares. the investors therefore. (ii) Benefit of Expert Advice. As a result of an underwriting contract. underwriters in India. As we have already explained that underwriters satisfy themselves with the financial integrity of the company and viability of the plan. They assure of the soundness of the company. Thus. An incidental advantage of underwriting is that the issuing company gets the benefit of expert advice. Generally. runs much less risk when they buy shares or debentures which have been underwritten by them. it may have to postpone its projects for which the issue was meant. The development in the field of underwriting has been the recent development since the establishment of various long-term industrial finance corporations. a company has not to wait till the shares have been subscribed before entering into the required contracts for purchase of fixed assets etc. it will have to go. The good underwriters being men or firms of financial integrity an established reputation.

they are able to tap the financial resources for the company not only in on particular area but also in other areas as well. The underwriting obligations. Underwriters render useful services to the perspective buyers of securities by giving them expert advice regarding the safe investment in sound companies. Underwriting commission is to be paid . For this purpose. they render useful services to the buyers of securities too. Following are the guidelines: Optional Underwriting has been made optional by the SEBI. that amount collected would be refunded to the investors. for issues since October 1994. Under writing Commission: The payment of underwriting commission depends on the amount of obligation devolving on the underwriter.throughout the country and in other countries too and as such. Sometimes they publish information and their expert opinion in respect of various companies. at any point it should not exceed 20 times an underwriters net worth. procedure inspection and disciplinary proceedings in case of default. Accordingly. Obligations Underwriters are obligated to follow scrupulously the general obligations and responsibilities. In this way marketability of securities increases and geographical dispersion of shares and debentures in promoted. (v) Service to Prospective Buyers. Number of Underwriters The issuers will decide the number of underwriters. Thus. Underwriting commission is payable by the issuer-corporation on the basis of the commission rates prescribed by SEBI. and disclose the same to SEBI underwriting arrangement should be filed with the stock exchange. SEBI GUIDELINES SEBI has issued detailed guidelines regulating underwriting as a financial service. and the outstanding commitments. Registration An important regulation announced by SEBI was the requirement for underwriting was to get it registered with SEBI and it should have a net worth Rs 20 Lac C. the lead managers must satisfy then about the net worth of the underwriters. if an is not been underwritten and the firm is not able to collect 90 percent of the amount offered to the public.

within 15 days of finalization of allotment. the commission is 2. In respect of equity shares.5 lakhs.5 percent on both the amount devolving on underwriter. They are the maximum ceiling rates and are negotiable. The maximum rates of underwriting. the commission is 2 percent for the amount devolving on underwriter and 1 percent on the amount subscribed by the public. and on the amount subscribed by the public In respect of preference. convertible and non-convertible debentures For underwriting upto Rs.5 percent on the amount subscribed by the public For underwriting exceeding Rs. the commission is 2.5 lakhs. RECENT ISSUES NHPC LTD . The Underwriters indicated their intention to underwrite Equity Shares: .5 percent for the amount devolving on underwriter and 1.

RAJ OIL MILLS LIMITED Underwriting Agreement The Underwriter have indicated their intention to underwrite the following number of Equity Shares: .

MAHINDRA HOLIDAYS & RESORTS INDIA LIMITED The Underwriters have indicated their intention to underwrite the following number of Equity Shares: .

JSW ENERGY LIMITED Underwriting Agreement . The Underwriters have indicated their intention to underwrite the following number of Equity Shares: .

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