"Unlocking the Secrets of Underwriting: Exploring Forms and SEBI Guidelines for Successful Investments"

Looking for insights on underwriting and the responsibilities of underwriters? Learn about SEBI guidelines for underwriting and the crucial role they play in financial markets. Discover more here!

1. UNDERWRITING SIMRANJEET KAUR

2. Contents Introduction Forms of Underwriting Role of underwriters SEBI Guidelines Underwriting 2

3. INTRODUCTION Underwriting is a contract whereby a responsibility is taken or a guarantee is given that if the securities (shares and debentures) that are issued to public through IPO are not subscribed fully, then the remaining part will be subscribed by the underwriter. The firm which undertakes the responsibility is known as underwriter. The underwriter assesses the risk of the business and guarantees a fixed amount to the issuer. For all of these provided to the issuer, underwriter will charge a commission In case of shares 5% of issue prices of shares In case of debentures 2.5% of issue price of debentures Underwriting 3

4. Forms of Underwriting Full Underwriting: It is an agreement under which the underwriter undertakes the guarantee of buying the whole of shares or debentures placed before the public in the event of non subscription. The liability of the underwriter is to buy and pay for the entire unsubscribed portion of the issue. Partial Underwriting: Under this type of agreement, the underwriter undertakes the guarantee for only part of the issue offered to the public and his liability is limited to the extent of unsubscribed portion of the issue underwritten by him. Joint Underwriting: Under this, when issue is at large scale and one underwriter is not capable to manage it so company will appoint more than one underwriter. Each underwriter undertakes the guarantee for the issue of a certain portion of the whole issue offered to the public. Underwriting 4

5. Forms of Underwriting Joint Underwriting: Under this, when issue is at large scale and one underwriter is not capable to manage it so company will appoint more than one underwriter. Each underwriter undertakes the guarantee for the issue of a certain portion of the whole issue offered to the public. Underwriters share the risk involved in the ratio of the number of shares or debentures underwritten by them. Syndicate Underwriting: Under this, a number of underwriting firms enter into an agreement among themselves to undertake the guarantee of buying shares or debentures of a large issue offered to the public. It is essentially different from joint underwriting so far as the agreement among underwriters is concerned. In this two types of separate agreements take place, one between the issuing company and the syndicate of underwriters, and the other among the underwriters who are members of the syndicate. Underwriting 5

6. Forms of Underwriting Firm Underwriting: When an underwriter undertakes to subscribe a certain number of shares or debentures irrespective of the subscription from the public, it is called firm underwriting. The liability of underwriters in in this is both for shares underwritten as well as such part of the shares as the public has not applied for. Firm underwriting generates confidence among investors and increases the chances of success of the issue. Sub-Underwriting: Sometimes, the underwriter enters into agreement with some other underwriters to undertake guarantee for the issue of whole or part of the issue underwritten by him. Such an agreement between the underwriter and other underwriters is known as sub-underwriting. The sub-underwriters have no agreement with company and work under the main underwriter who pays them some commission out of his underwriting commission. Underwriting 6

7. Forms of Underwriting Outright Purchase of Issues: in all the six forms of underwriting agreements discussed above, the underwriters provide the services on commission basis. However, in some cases the underwriters, instead of undertaking guarantee to buy shares or debentures not subscribed by the public, may enter into an agreement to outrightly purchase the issue (shares or debentures) at an agreed price and arrange to sell the same latter through their own agreements. Underwriting 7

8. Role of Underwriters Provides assurance of adequate finance. Supplies valuable information to the company. Example: How they should offer their securities etc. Distribution of securities ( After buying securities, they distribute these to the real investors through agents) It enhance the goodwill of issuing company. Service to society(increase in employment and income) Service to prospective investors ( Capital information) Underwriting 8

9. SEBI Guidelines As per the original guidelines issued by SEBI on 11.6.1992, underwriting was mandatory for full issue and minimum requirement of 90% subscription was also mandatory for each issue of capital to public. However, as per the Revised Guidelines issued by SEBI on 10.10.94, underwriting is not mandatory now and the issuers have the option of deciding whether the issue is to be underwritten or not . Number of underwriters would also be decided by the issuers. If the issue is not underwritten and if the minimum subscription of 90% of the offer to the public is not received, the entire amount received as subscription would have to be returned in full. Underwriting 9

10. SEBI Guidelines If the issue is underwritten and if the company does not receive 90% of the issued amount from public subscription plus accepted development from underwriters, within 60 days of the opening of the issue, the company should refund the amount of subscription. In case of disputed development, the should refund the amount of subscription. In case of disputed devolvement, the company should refund the subscription if the above conditions are not met. Underwriting 10

11. SEBI Guidelines The lead manager(s) must satisfy themselves about the net worth of the underwriters and the outstanding commitment and disclose the same to SEBI. A statement to this effect should be incorporated in the prospectus. The underwriting agreement may filed to SEBI. Underwriting 11

12. Thank you Simranjeet kaur 