UNDERWRITING

WHAT IS UNDERWRITING?
MEANING : A guarantee given by underwriters to take up whole or part of the issue of securities not subscribed by the public.  It refers to the process that a large financial service provider like bank, insurer, or investment house uses to assess the eligibility of a customer to receive their products.

The products mainly are : equity capital  insurance  mortgage credit

Popularity
It shows that underwriting gained popularity after 1955, particularly after the setting up of the Industrial Credit and investment corporation of India (ICICI) in January 1955 Later other institutions like LIC, IDBI, UTI took active part in underwriting new issues.

UNDERWRITER : The financial services intermediary who arranges for underwriting function is called as underwriter. Who acts as an underwriter?  National financial institutions  Commercial banks Merchant bankers  Members of stock exchange

TYPES OF UNDERWRITING :
(i) Firm Underwriting. 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 the minds of investing 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 wit other underwriters to share the risk. This contract entered into between the main underwriter and the other underwrites is called Subunderwriting an he other underwriters are called Subunderwriters. The company is nowhere in the picture. Sub-underwriters are offered a commission slightly below the underwriting commission.

(iii) Syndicate Underwriting. 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. Sometimes, these underwriters to the contract form a new consortium or syndicate. Such a system is called Syndicate Underwriting. It is very popular in Germany.

Importance of Underwriting
Underwriting is a good technique of marketing the securities. The importance of under-writing can be adjudged by the following advantages (i) Assurance of Adequate Finance. Underwriting is a guarantee given buy the underwriters to take up the whole issue or remaining shares, not subscribed by public. In the absence an underwriting agreement, a company may face a situation where even minimum subscription is not received and, it will have to go, into liquidation. In case of an existing company, it may have to postpone its projects for which the issue was meant. As a result of an underwriting contract, 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 can go ahead with its plan confidently. Thus, underwriting agreement assures of the required funds within a reasonable or agreed time.

(ii) Benefit of Expert Advice. An incidental advantage of underwriting is that the issuing company gets the benefit of expert advice. 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, enabling the company to avid certain pitfalls. (iii) Increase in Goodwill of the Company. The good underwriters being men or firms of financial integrity an established reputation. As we have already explained that underwriters satisfy themselves with the financial integrity of the company and viability of the plan, the investors therefore, runs much less risk when they buy shares or debentures which have been underwritten by them. They assure of the soundness of company. Thus, good underwriters increase the goodwill of the company.

(iv) Geographical Dispersion of Securities. Generally, underwriters maintain working arrangement wit other underwriters and broken throughout the country and in other countries too and as such, they are able to tap the financial resources for the company not only in on particular area but also in other areas as well. In this way marketability of securities increases and geographical dispersion of shares and debentures in promoted. (v) Service to Prospective Buyers. Underwriters render useful services to the perspective buyers of securities by giving them expert advice regarding the safe investment in sound companies. Sometimes they publish information and their expert opinion in respect of various companies. Thus, they render useful services to the buyers of securities too.

FUNCTIONS OF UNDERWRITERS
(i) Purchase of Securities. The main function of underwriters is to purchase the securities of financially sound Companies either direct from the company or from the market. Thus, they maintain their goodwill in the market a stockists of good securities. (ii) Distribution of Securities. Underwriters distribute the securities to the real investors after entering the agreement with the issuing company. The underwriters take up securities under an obligation under underwriting contract or sometimes make firm underwriting and distribute such securities to the investors by selling them int the market at the earliest.

(iii) Supplying Information of Companies. Underwriters supply important information in regard to investors attitude, market conditions etc. to the issuing company and to suggest necessary changes in their financial plans. (v) Exchange in Securities. Underwriters provide stability in the price of securities by purchasing an selling the various securities by maintaining equilibrium in the demand and supply position of the securities and thus keep the market alive.

Factors considered while selecting underwriters

Financial strength Experience in the primary market Past underwriting performance and defaults if any Network of investor clientele Overall reputation

Underwriting agreement
A contract between an underwriter and the company issuing capital with regard to the commitment for subscription of securities is known as underwriting agreement . while arrangements The resources of the underwriters and The marketing aspects of the issue are kept in mind.

Reasons of slow Progress of Underwriting In India

In spite of the several advantages of underwriting, it had made a little head way in India. (i) Slow Progress of Industrialization. India made a late beginning in the field of industrial development because of the British empire policy of industrializations. No planned efforts write made in this direction before independence. So, India remained without a developed capital market for a long time. Underwriting cannot be in advance of industrializations.

(ii) (ii) Managing Agency System. Managing agents indirectly stood in the way of the underwriting institutions. They themselves preformed the function of underwriting by selling the securities of managed Companies to their friends and relatives.

(iii) Nature of Indian Investors. Indian capital is said to be shy. Indian investors do not like to invest their savings in shares and debentures of Companies. Only due to this fact, India remained backward in industrial field and hence in the field of underwriting. (iv) Attitude of Banks. Indian commercial banks have been organised on British pattern. So, they, as a matter of policy, kept themselves away from industrial banking an underwriting.

(v) Lack of Specialized Financial Institutions. Due to industrial backwardness of the country, India did not have specialized financial institutions, like the investment bankers of U.S.A. or the issue houses of U.K. But since independence, a much headway has been make in this direction and several financial institutions have been established. Commercial banks also have started the underwriting activities jointly led by State Bank of India. (vi) More Risk. The capital market in India had been quite unorganized and capital formation remained inadequate and rather negligible. The development of joint stock companies showed as ugly face to the Indian investors due to failure of their business within a short spell after their incorporation and they lost their faith in them. Moreover, the companies which entered into an agreement with as underwriter, had been suspected by the investors. Consequently, there was more risk in underwriting. Their point of view has been changed now.

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