UNDERWRITING OF SHARES AND DEBENTURES.

MEANING OF UNDERWRITING
Underwriting means undertaking a responsibility or giving a guarantee that the shares or debentures offered to the public will be subscribed for in full. The persons or institutions that give such guarantee are called underwriters. For this service underwriters charge a commission which is generally calculated at a specified rate on the issue price of the whole of the shares or debentures underwritten.

UNDERWRITING IS OPTIONAL
As per the SEBI guidelines underwriting is optional. But if the issue is not underwritten and the minimum subscription of 90% of the offer to the public is not received on the closure of the issue, the entire amount received as subscription would have to be refunded in full.

TYPES OF UNDERWRITING
Underwriting are of three types :*Full underwriting *Partial underwriting *Firm underwriting

1. Full underwriting
If the underwriters underwrite the whole of the issue of shares or debentures of a company, it is called full underwriting. Example :Suppose ABC ltd issues 1,00,000 equity shares of Rs. 10 each at par. The whole of the issue is underwritten by IDBI. This is the case of full underwriting. If the public applied for 95,000 shares. In this case the liability of the underwriter. No. Of shares issued by ABC Ltd. 1,00,000 less- applications received 95,000 Undersubscribed 5,000 ABC Ltd will be liable to take up all the shares remaining unsubscribed i.e. 5000 shares.

2. Partial underwriting
If the underwriters underwrite only a part of the issue of shares or debentures of the company, it is called partial underwriting.
Example :-

Suppose XYZ Ltd issues 1,00,000 equity shares of Rs. 10 each at par. 80% of the issue is underwritten by IDBI. This is the case of partial underwriting.

3. Firm underwriting
If the underwriters make a definite commitment to take up a specified number of shares or debentures irrespective of the results of the public response to the issue, it is called Firm underwriting.
Example:-

Suppose X Ltd issues 1,00,000 equity shares of Rs. 10 each at par. 80% of the issue is underwritten by the IDBI with the definite commitment to take up 10,000 shares. This is the case of firm underwriting.

Advantages:
Guarantee of full subscription: The main advantage of underwriting is that the underwriters give a guarantee that the shares offered to the public will be subscribe for in full. Thus in case of poor public response, the underwriters will take up the balance of shares not subscribed for the public and pay for them.
Boost up the confidence of investors: Underwriting of shares

boost up the confidence of the investors. They generally feel that the underwriters underwrite the shares of only good companies.

Expert financial advise: In addition to underwriting of shares, the company also gets the expert financial advise of underwriters as to where, when and how the shares are to be sold.

Provisions regarding the payment of underwriting commission

.

The consideration payable to underwriters for

underwriting the issue of shares or debentures of a company is called underwriting commission.

It may be paid in cash or in fully paid shares

or debentures.

 Section 76 of companies act lays down certain

conditions relating to the payment of underwriting commission which must be complied with.

These are : 1)The payment of commission must be authorised by the articles of association. 2) The commission paid or agreed to paid must not exceed : * In case of shares:- 5% of the issue price of the shares or the rate authorised by the articles whichever is less. *In case of debentures:- 2.5% of the issue price of the shares or the rate authorised by the articles whichever is less.

Continued
3) The amount or rate of commission should be disclosed in the prospectus or statement in lieu of prospectus as the case may be or in the statement filed with the registrar before the payment of the commission. 4) A copy of contract relating to the payment of the commission should be deliver to the registrar.

References:
Websites: http://www.authorstream.com/Presentation www.investopedia.com/terms/u/underwriter.asp

Books: Company Law (11th edition) A.K. Majumdar and Dr. G.K. Kapoor

Varsha. Daryanani Roll No.- 27

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