Underwriter

 A company or other entity that administers the

public issuance and distribution of securities from
a corporation or other issuing body.
An underwriter works closely with the issuing

body to determine the offering price of the

securities, buys them from the issuer and sells
them to investors via the
underwriter's distribution network.
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 Nature
 Underwriting is an agreement, entered into 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.
 The financial agency is known as the underwriter and
it agrees to buy that part of the company issues which
are not subscribed to by the public in consideration of a
specified underwriting commission.

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 Content of agreement
 The underwriting agreement, among others, must provide for
the period during which the agreement is in force, the amount
of underwriting obligations, the period within which the
underwriter has to subscribe to the issue after being intimated
by the issuer, the amount of commission and details of
arrangements, if any, made by the underwriter for fulfilling the
underwriting obligations.
 The underwriting commission may not exceed 5 percent on
shares and 2.5 percent in case of debentures.
 Underwriters get their commission irrespective of whether
they have to buy a single security or not.

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 Benefits
 It relieves the company of the risk and uncertainty of
marketing the securities.
 Underwriters have an intimate and specialized
knowledge of the capital market. They offer valuable
advice to the issuing company in the preparation of the
prospectus, time of floatation and the price of securities,
etc.
 They also provide publicity service to the companies
which have entered into underwriting agreements with
them.
 It helps in financing of new enterprises and in the
expansion of the existing projects.

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 It builds up investors' confidence in the issue of securities.
The association of well-known underwriters lends prestige
to the company and the investors feel that the issue is
sound enough for profitable investment. Also, the securities
underwritten by reputed underwriters receives better
response from the public.
 The issuing company is assured of the availability of funds.
Important projects are not delayed for want of funds.
.

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 It facilitates the geographical dispersal of
securities because generally, the
underwriters maintain contacts with
investors throughout the country

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 Types of underwriting
 Syndicate Underwriting:- is one in which, two or
more agencies or underwriters jointly underwrite an
issue of securities. Such an arrangement is entered
into when the total issue is beyond the resources of
one underwriter or when he does not want to block up
large amount of funds in one issue.
 Sub-Underwriting:- is one in which an underwriter
gets a part of the issue further underwritten by
another agency. This is done to diffuse the risk
involved in underwriting. The name of every under-
writer is mentioned in the prospectus along with the
amount of securities underwritten by him.

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 Firm Underwriting:- is one in which the underwriters apply
for a block of securities. Under it, the underwriters agree to
take up and pay for this block of securities as ordinary
subscribers in addition to their commitment as underwriters.
The underwriter need not take up the whole of the securities
underwritten by him.
 For example, if the underwriter has underwritten the entire
issue of 5 lakh shares offered by a company and has in
addition applied for 1 lakh shares for firm allotment. If the
public subscribes to the entire issue, the underwriter would be
allotted 1 lakh shares even though he is not required to take up
any of the shares.

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 Types of underwriters
 Underwriting of capital issues has become very popular due to
the development of the capital market and special financial
institutions. The lead taken by public financial institutions has
encouraged banks, insurance companies and stock brokers to
underwrite on a regular basis. The various types of
underwriters differ in their approach and attitude towards
underwriting:-
 Development banks like IFCI, ICICI and IDBI:- they
follow an entirely objective approach. They stress upon the
long-term viability of the enterprise rather than immediate
profitability of the capital issue. They attempt to encourage
public response to new issues of securities.

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 Institutional investors like LIC and AXIS:-
their underwriting policy is governed by their
investment policy.
 Financial and development corporations:-
they also follow an objective policy while
underwriting capital issues.

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 Investment and insurance companies and
stock-brokers:- they 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.

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 Legal Requirement
 To act as an underwriter, a certificate of
registration must be obtained from Securities
and Exchange Board of India (SEBI)
 The certificate is granted by SEBI under the
Securities and Exchanges Board of India (Underwr
.

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 These regulations deal primarily with issues such as
registration, capital adequacy, obligation and
responsibilities of the underwriters.
 Under it, an underwriter is required to enter into a
valid agreement with the issuer entity and the said
agreement among other things should define the
allocation of duties and responsibilities between him
and the issuer entity.
 These regulations have been further amended by the
Securities and Exchange Board of India (Underwriters) (A
.
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 Capital /other requirement
 Shall not be less than the net worth of 20 lakhs
 Form A and certificate (Form B) is required.
 A stock broker or merchant banker acting as
an underwriter shall be governed by these
regulation in other respects.

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 Registration fee
 Every underwriter shall pay a sum of Rs.5
lakhs as registration fees at the time of grant of
certificate by the Board.
 Every underwriter to keep registration in force
shall pay renewal fee of Rs.2 lakhs every
three years from the fourth year from the date
of initial registration.

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 Not applicable
 Stock brokers and merchant banker

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 General responsibilities
 The total underwriting obligations under all
the agreement shall not exceed 20 times of the
net worth.
 Every underwriter, shall subscribe securities
within 45 days of the receipt of intimation
from such body corporate ( in event of being
called upon to subscribe for securities of a
body corporate pursuant to an agreement)

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Period of maintenance of records
 5 years minimum
 Every underwriter shall appoint a compliance
officer.

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 Value of Taxable Service
 Value of taxable service in relation to the service provided by
an underwriter to a client, shall be the gross amount charged
by such underwriter from the client for services rendered in
relation to underwriting in any manner”. (Section 67 of
Finance Act, 1994 as amended)
 As per Regulation 14 of the SEBI (Underwriters) Regulation,
1993 the agreement between the Underwriter and the body
corporate shall also provide for the amount of commission or
brokerage payable to the underwriter.
 Service Tax is required to be paid by the underwriter at the
rate of 5% on such commission or brokerage paid to him for
the services of underwriting rendered by him.

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 The underwriting commission varies depending upon
the category of underwriter whether a financial
institution or otherwise and also on the amount/s
devolving on the public and those devolving on the
underwriters.
 However the maximum underwriting commission
applicable is notified by the Banking Department of
the Ministry of Finance, though, lower rates of
underwriting commission can also be negotiated
between the underwriter and the client.
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 Green shoe option
 A provision contained in an underwriting
agreement that gives the underwriter the right
to sell investors more shares than originally
planned by the issuer.
 This would normally be done if the demand
for a security issue proves higher than
expected. Legally referred to as an over-
allotment option.

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 A green shoe option can provide additional price stability to a
security issue because the underwriter has the ability to increase
supply and smooth out price fluctuations if demand surges.
 Green shoe options typically allow underwriters to sell up to 15%
more shares than the original number set by the issuer, if demand
conditions warrant such action.
 However, some issuers prefer not to include greenshoe options in
their underwriting agreements under certain circumstances, such as
if the issuer wants to fund a specific project with a fixed amount of
cost and does not want more capital than it originally sought.
 The term is derived from the fact that the Green Shoe Company
was the first to issue this type of option.

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