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CHAPTER- V

PERFORMANCE EVALUATION OF MERCHANT BANKERS-II (UNDERWRITING OF PUBLIC ISSUES)

Underwriting of shares is linked with the management of public issues as it

involves marketing and distribution of securities offered to public. Merchant bankers

as ‘lead managers to the public issues’ are not responsible only for selecting and

appointing other financial intermediaries related to the issue, but also for arranging

and coordinating the activities of underwriters, brokers, registrar and bankers to the

issue etc.

Underwriting, in the context of primary capital market, refers to contractually

guaranteeing subscription to shares and other securities. Herein, the underwriters

undertake a responsibility or give a guarantee that the securities offered to the public

or shareholders will be subscribed for. If the issuer is not sure of the subscription of

the issue, he first underwrites the shares with financial institution/lead managers. If

the shares are subscribed fully by the public, the underwriters get a commission as a

percentage of total amount of shares issued. In case the issue is undersubscribed, then

the underwriters have to buy the unsubscribed portion of the issue or to the extent of

his guarantee.

Underwriting of capital issues in India is regulated by Securities and Exchange

Board of India. According to SEBI (Underwriters) Rules, 1993, underwriting means

“an agreement with or without conditions to subscribe to the securities of a body

corporate when the existing shareholders of such body corporate or the public do not

subscribe to the securities offered to them”. And an underwriter has been defined as

“a person, who engages in the business of underwriting of an issue of securities of a

body corporate”.

In the western countries, especially UK and USA, underwriting means

purchase of securities from the company by the investment bankers, who

subsequently sell it to the public. In India, if the minimum subscription of 90% of the

issue is not subscribed by the public, then the company has to refund the amount to

the applicants. So the promoters, before issuing the prospectus for the issue of shares,

have to ensure against the contingent risk of failure of the issue.

The underwriters repose a confidence in the minds of investors and help in the

mobilization of funds of the individual investors. The retail investors always need

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protection of his investment in a project and so the services of underwriting

institutions are required. Dolvin in his research paper has stated that underwriters do

create value for issuer in the sense that offer price goes higher for the issues managed

by reputed underwriters. It implies that higher quality underwriters apply more

subjective criteria for selecting offer prices and/or that the criteria employed are of

higher quality1.

In the selection of underwriters, financial strength is a major consideration.

Other aspects taken into consideration are experience in the primary market, past

underwriting performance and defaults, outstanding underwriting commitments, the

network of investors, clients of the underwriter and overall reputation. The

underwriter on his part has to assess the company’s standing and record, competence

of the management, objects of the issue, project details, offer price and other terms of

the issue and off balance sheet liabilities before accepting the underwriting

obligations2.

5.1 Underwriting of Capital Issues in India Underwriting of capital issues in India is of recent origin as compared to the

developed capital markets of UK and USA. During the British rule, London based

Managing Agency Houses in India performed the principal activities of floatation of

corporate securities and hence the presence of pure merchant banks was negligible.

Indian business houses also copied the system from British firms and established

Managing Agency Houses as family business in the pre World War-II era. Many of

these later on converted into partnership firms and public limited companies. The

prominent Indian managing agency housed included: Tatas, Birlas, Dalmias,

Singhanias, Thapars, Bhadanis, Narangs, Ruias, Poddars and J.K.3.

Underwriting of capital issues did not develop in India during this period

because of the monopoly of managing agency houses distributing shares to their

friends and relatives. The underdeveloped capital market was characterized by low

income, low savings, poverty circle and the absence of banking habits among public

at large4.

Underwriting of securities in India had its beginning in 1912, when M/s

Batliwala and Karani, a firm of share brokers in Bombay had underwritten the capital

issue of 50 lakh shares of Central India Spinning & Weaving Co. Ltd. In the year

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1913, Chunilal Saralya underwrote the public issue of preference shares of Tata Mills

Ltd.

The amendments in the Indian Companies Act, 1936 made it obligatory to

include in the prospectus, the names of the underwriters, the underwriting commission

payable and a statement by the directors to the effect that the underwriters have

requisite financial resources. The contract between the issuing company and the

underwriters was made accessible to the shareholders5.

Immediately after independence, the Capital Issues (Control) Act, 1947 was

passed by Parliament to regulate and control the capital issues by companies. It was

administered through the office of the Controller of Capital Issues under the Ministry

of Finance (Department of Economic Affairs). Indian Companies Act, 1956 further

streamlined the procedure for capital issues including underwriting of capital issues

and it facilitated the growth of capital market in the country after independence.

Data collected from the Reports of the RBI on Currency and Finance has

revealed that the proportion of private capital issues underwritten was 91.65% in

1971, 97.09% in 1976, 56.84% in 1981, 63.78% in 1986, 60.65% in 1987 and 61.59%

in 1988. Underwriters’ subscription as a percentage to total subscription stood at

41.95% in 1971, 49.35% in 1976, 11.27% in 1981, 0.95% in 1986, 3.26% in 1987 and

17.36% in 1988.

Since 1992, the regulations and control of various players in the primary

market have been under the supervision and control of SEBI. From time to time, it has

laid down guidelines for these players including underwriters of capital issues in

India.

5.1.1 SEBI Guidelines on Underwriting Securities and Exchange Board of India (Underwriters) Rules, 1993 as

amended from time to time provide for the compulsory registration of underwriters,

provisions for the capital adequacy requirements, general obligations and

responsibilities with a specified code of conduct, inspection and disciplinary

proceedings by the SEBI and the procedure for action against underwriters in case of

default.

Similarly SEBI (Disclosure & Investor Protection) Guidelines, 2000 as amended

from time to time have prescribed a number of guidelines for the underwriters to the

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capital issues and the lead managers responsible for the success of the issue. Some of

these guidelines have been mentioned below.

(a) As per original guidelines issued by SEBI on June 11, 1992, underwriting was

mandatory for full issues and minimum requirements of 90% subscription was

also mandatory for each issue of capital to public. However, from October

1994, underwriting is not mandatory and now the issuer has the option to

decide whether the issue is to be underwritten or not. Number of underwriters

would also be decided by the issuers.

(b) 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 has to be incorporated in the prospectus.

(c) If the issue is underwritten and the company does not receive 90% of the

issued amount from public subscription plus accepted devolvement from

underwriters within 60 days of the opening of the issue, the company will

refund the amount of subscription. In case of disputed devolvement, the

company should refund the subscription, if the above conditions are not met.

(d) If the issue is not underwritten and 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.

The requirement of minimum 90% subscription will not apply for

exclusive debt issues provided the issuer makes adequate disclosures about the

alternative source of finance that have been tied up.

(e) The underwriting agreement may be filed with SEBI and should be open to

public during the period issue remains open.

(f) In respect to every underwritten issue, the lead merchant banker(s) shall

undertake a minimum underwriting obligation of 5% of the total underwriting

commitment or Rs 25 lacs, whichever is less, or else arrange for underwriting

of an equal amount by merchant banker associated with the issue and intimate

the same to SEBI.

(g) The outstanding underwriting commitments of a merchant banker shall not

exceed 20 times its networth at any point of time.

(h) In the case of under subscription of an issue, the lead merchant bank

responsible for underwriting arrangement shall invoke underwriting

obligations and ensure that the underwriters pay the amount of devolvement.

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The same shall be incorporated in the inter-se allocation of responsibilities of

lead managers and shall accompany the due diligence certificate submitted by

the lead merchant banker to SEBI.

(i) In case there is a devolvement on underwriters, the lead manager shall ensure

that the underwriter(s) honour their commitments within 60 days from the date

of closure of the issue.

(j) In case of under subscribed issues, the lead manager shall furnish information

to SEBI, in respect of underwriters, who have failed to meet their underwriting

devolvement.

(k) In case of Book Building Issues:

(i) The ‘syndicate members’ shall enter into an underwriting agreement

with the Book Runner (s) indicating the number of securities which

they would subscribe at the pre determined price.

(ii) The Book Runner (s) shall in turn enter into an underwriting

agreement with the issuing company.

(iii) In the event of syndicate members not fulfilling their underwriting

obligations, the Book Runner Lead Managers shall be responsible for

bringing the amount devolved.

5.1.2 Underwriting Commission The Consideration for the underwriters, who provide guarantee against under

subscription of securities, is by way of commission payable on issue price at a

predetermined rate, of course within Govt. guidelines. Sometimes underwriting

agreement may state to pay the commission only on the amount devolved on the

underwriters and not on the total size of the issue. This is called contingent

underwriting.

The rate of underwriting commission as permitted by the Govt. is stated in the

following table.

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Table 5.1

Rates of Underwriting Commission

(For public issue of shares and debentures)

S. No. On amount devolving On underwriters

on amount subscribed by

public 1. Shares 2.5% 2.5%

2. Preference Shares and on non Convertible debentures

(a) For amount upto 5 lakhs 2.5% 1.5%

(b) For amount in excess of 5 lakhs 2.0% 1.0%

These rates of commission are the maximum ceiling rates, within which any

company will be free to negotiate with the underwriters. Underwriting commission

will not be payable on amounts of shares subscribed by promoters group, employees,

directors, their relatives and friends and to business associates.

5.2 Pattern of Underwriting of Public Issues since 1992-93 Till October 1994, underwriting of public issues was mandatory. Underwriting

was only for issues to the public which excluded reserved/preferential allotment to

reserved categories. In other words, underwriting was mandatory only to the extent of

net offer to the public.

Underwriting was made mandatory for public issues at par and with premium

of less than 25% of par value. The underwriting business in this period was very

lucrative. Due to favourable market conditions and good public response,

devolvement on underwriters was very low till 1992-93. In 1992-93, a large number

of underwriters lost their money as the new issues were not found to be profitable in

the secondary market. The devolvement on underwriters became large resulting into

the non fulfillment of their commitments by the underwriters.

The following table exhibits the number and amount of public issues

underwritten during the period from 1992-93 to 1996-97.

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Table 5.2

Public Issues Underwritten and Amount of Issues Involved

Year Total Public Issues Floated

Public Issues Underwritten

No. Amount Rs. (crore)

No. % Amount Rs. (crore)

%

1992-93 528 6,060.83 518 98.1 5,776.89 95

1993-94 770 12,544.04 754 97.8 8,952.01 71

1994-95 1,343 13,311.6 1,094 81.5 1,0286.09 77

1995-96 1,428 10,981.72 440 30.8 3,257.03 30

1996-97 753 11,648.2 85 11.3 912.13 8

Total 4,822 54,546.39 2,891 59.9 29,184.15 53.5

Source:- Compiled from Prime Directories of relevant years.

As shown in the table, proportion of number and amount of public issues

underwritten has been higher from 1992-93 to 1994-95, because of the mandatory

requirement of underwriting. After October 1994, when underwriting was made

optional for the issuer, they did not prefer the services of the underwriters. So in

1995-96 only 440 issuers preferred to appoint underwriters out of 1428 public issuers

during the year. There was a significant decline in the underwriting business in 1996-

97 when only 85 public issues out of 753 issues were underwritten which involved a

meagre sum of 8% of the total issue amount.

There were about 2,128 underwriters in 1994-95, out of which 1,712 were

brokers and 333 were private merchant banks. In 1995-96, 411 merchant banks, 1207

brokers, 50 banks and their subsidiaries, 10 financial Institutions and 9 foreign banks

participated in the underwriting activities of 440 public issues for a sum of Rs. 3257

crore. Private merchant banks and brokers accounted for 67% of underwriting in

1995-96 while remaining portion was underwritten by banks and financial

Institutions. Till 1992-93, financial Institutions and banks dominated the underwriting

business after which this place was acquired by private merchant banks and brokers.

In 1996-97, private merchant banks got 55% and brokers 23% of underwriting

business, while share of financial Institutions and banks was only 22%.

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5.3 Underwriting of Public Issues during the Period of 1997-98 to 2008-09 The pattern of underwriting of public issues changed after October 1994, when

SEBI made underwriting optional for the issuing company. As the merchant banker (

in the capacity of lead manager) is responsible for the overall management of public

issues including appointment of underwriters, so analysis of the pattern of

underwriting activities during the period of study has significance in this context.

This section of chapter focuses on the trend of underwriting of public issues,

participation of different classes of underwriters, amount of public issues underwritten

by Indian and foreign based merchant bankers during the period from 1997-98 to

2008-09. During this period only one debt issue was underwritten for Rs. 56.78 crore

in 1999-2000. Other companies going to public for debt issues did not prefer to

underwrite their issues. So in this section, underwriting of equity issues has been

analysed.

5.3.1 Pattern of Public Issues Underwritten during 1997-98 to 2008-09 Primary capital market in India remained stagnant from 1997-98 to 2002-03

and so was the underwriting activities. During this period, public issue market was

dominated by debt issues of bonds and debentures mainly by two financial

Institutions, that is, ICICI Ltd and IDBI Ltd. These issuers did not appoint any

underwriter for their issues. Even in public issue of equity shares, most of the issuers

did not prefer to underwrite their public issues. So, underwriting activities were

limited during this period. Merchant bankers have to go for alternative business

during this period. Primary market got a boost from 2003-04 onward and the pattern

of issue market changed from the dominance of debt issues to equity issues.

Table 5.3 provides information on the pattern of underwriting of equity shares

during the period from 1997-98 to 2008-09.

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Table 5.3

Public Issues of Equity Floated and Underwritten

(Amount in Rs. Crore)

Year Total Equity Issues floated Equity Issues Underwritten

Proportion of EquityUnderwritten

No. Amount Average

No. Amount Average % of No.

% Amount

1997-98 58 1,132.00 19.52 10 268.55 26.85 17.24 23.72

1998-99 22 504.02 22.9 7 158.48 22.64 31.81 31.44

1999-00 55 2,975.25 54.09 18* 2,158.66** 119.92 32.72 72.55

2000-01 115 2,483.76 21.6 19 1,542.08 81.16 16.52 62.08

2001-02 6 1082.00 180.33 2 908.52 454.25 33.33 83.97

2002-03 6 1,038.68 173.11 2 254.84 127.42 33.33 24.53

2003-04 29 17,820.98 614.52 14 16,485.22 1,177.51 48.28 92.50

2004-05 29 21,431.56 739.02 20 21,029.88 1,051.49 68.96 98.13

2005-06 102 23,675.70 232.11 81 22,398.48 276.52 79.41 94.60

2006-07 85 24,993.37 294.04 74 24,164.68 326.55 87.06 96.68

2007-08 90 52,219.00 580.21 79 50,608.34 640.61 87.78 96.91

2008-09 21 2,034.00 96.86 17 1,959.92 115.29 80.95 96.36

Total 618 1,51,390.32 244.97 325 1,41,937.65 436.73 52.59 93.76

Note: - * This number includes one issue of debt. ** This includes amount of debt issue of Rs. 56.78 crore.

Source:- Compiled from offer documents of companies, SEBI website and Prime Directories of relevant years.

It has been found from the table 5.3 that out of total 618 equity issues floated,

only 325 issuers preferred to underwrite their public issues of equity. The percentage

share of number of equity issues underwritten varied from 16.52% in 2000-01 to

87.78% in 2007-08. The largest number of equity issues were underwritten in 2005-06

(81) and 2007-08 (79). Total amount of equity issues underwritten was Rs.

1,41,937.65 crores out of Rs. 1,51,390.32 crore mobilised through equity shares

during the period under review. The largest annual amount of Rs. 50,608.34 crore was

underwritten in 2007-08 followed by Rs. 24,164.68 crores in 2007-08. The percentage

share of amount of equity issues underwritten varied from 23.72% in 1997-98 to

98.13% in 2004-05. An increasing trend in the amount of underwriting of equity

shares was found during the period under review and more than 90% of the amount

was found to have underwritten after 2003-04.

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The average size of issues underwritten has been found higher than the

average size of equity issues floated in all the years except 2002-03. The aggregate

average size of equity issues floated during the period of study stood at Rs. 244.97

crore, while the average size of issues underwritten was Rs. 436.73 crore. It may,

thus, be concluded that the issues of comparative large size was underwritten and

underwriters did not show much interest to underwrite equity issues of small size.

This has been further proved by the analysis of year-wise average size of equity issues

floated and underwritten.

Relationship between amount of equity issues floated and the amount

underwritten has also been shown in the following chart.

Chart 5.1

Amount of Public Issues Raised and Underwritten

5.3.2 Classes of Underwriters in Public Issues of Equities

There are a number of classes of agencies providing underwriting services in

primary market in India. These include private merchant bankers, financial

institutions and development banks, commercial banks and their subsidiaries, and

brokers of stock exchanges. Different classes of underwriters differ in their approach

and attitude towards underwriting. Participation of financial institutions and

development banks in underwriting activities is guided by their long term investment

policy. On the other hand, merchant bankers, banks and stock exchange brokers put

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primary emphasis on short term prospects, as they cannot afford to block large funds

for long period of time.

As observed from the offer documents for equity issues floated during the

period under review, two or more underwriters have jointly underwritten majority of

equity issues floated. So, it was found difficult to assign a particular equity issue to a

single underwriter and number of equity issues has not been assigned to different

classes of underwriters.

Year wise amount of equity issue underwritten by different classes of

underwriters along with the percentage share in total amount underwritten during the

period of study is presented in table 5.4

Table 5.4

Public Issues of Equities Underwritten by Different Classes of Underwriters (Amount in Rs. Crores)

Year Private merchant Bankers

Financial Institutions

Banks and Subsidiaries

Brokers (Stock Exchange

Total Amount Underwritten

Amount % Amount % Amount % Amount % Amount 1997-98 95.00 35 110.00 41 61.00 23 2.55 1 268.55

1998-99 29.00 18 122.00 77 6.00 4 1.48 1 158.48

1999-00 1,632.41 76 422.86 20 75.98 3 27.41 1 2,158.66

2000-01 1,088.48 71 412.07 27 1.99 - 39.54 2 1,542.08

2001-02 834.52 92 60.00 7 13.50 1 0.50 - 908.52

2002-03 254.84 100 - - - - - - 254.84

2003-04 14,671.85 89 - - 1,813.37 11 - - 16,485.22

2004-05 15,773.00 75 - - 2,944.00 14 2,312.88 11 21,029.88

2005-06 18,366.75 82 - - 3,135.78 14 895.95 4 22,398.48

2006-07 18,848.45 78 - - 2,899.76 12 2,416.47 10 24,164.68

2007-08 42,492.43 84 - - 6,876.91 14 1,239.00 2 50,608.34

2008-09 1,572.10 80 - - 140.69 7 247.13 13 1,959.92

Total 1,15,658.83 81.48 1,126.93 0.79 17,968.98 12.65 7,182.91 5.06 1,41,937.65

Source: Compiled from offer documents, Prime Directories of relevant years.

As shown in the table 5.4, a lion’s share in the underwriting of equity issues

has been procured by private merchant bankers during the period from 1997-98 to

2008-09. They were able to underwrite an aggregate amount of Rs. 1,15,658.38 crore

(81.48%) out of Rs. 1,41,937.65 crore underwritten during this period. The percentage

share in total amount underwritten by private merchant bankers varied between 18%

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in 1998-99 to 100% in 2002-03. The largest amount of Rs.42,492.43 crore was

underwritten by private merchant bankers in 2007-08. This was followed by

commercial banks and their subsidiaries with a share of 12.65% of total amount

underwritten. Their proportionate contribution in total amount underwritten has been

fluctuating up to the year 2002-03. However, it remained generally steady (11% to

14%) from 2003-04 onward. Financial Institutions like IFCI Ltd. were found to be

active during the first half of the period under review and it had underwritten even

upto 77% of amount during 1998-99. These institutions were active till the year 2001-

02 and remained away from underwriting business afterward. These institutions could

underwrite an aggregate amount of Rs. 1126.93 crore (0.79% of the total) only.

Stock exchange brokers who participated in underwriting activities on adhoc

basis, managed to underwrite 5.06% of total amount underwritten during this period.

However, they were more active during the latter years of period under review.

Among the stock brokers Karvy Stock Broking Ltd., Enam Securities Pvt. Ltd.,

Keynote Capital Ltd., Kotak Securities and Almondz Global Securities played

dominating role in the business of underwriting of public issues.

Amount underwritten by various classes of underwriters have also been shown

in the following pie chart

Chart 5.2

Amount of Public Issues Underwritten by Various Classes of Underwriters

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5.3.3 Public Issues of Equity Underwritten by Lead Merchant Bankers SEBI provisions have made it mandatory for a lead manager to undertake in

respect of every underwritten issue, a minimum underwriting obligation of 5% of the

total underwriting commitment or Rs. 25 lakhs, whichever is less. If he is unable to do

so, he has to make arrangements for underwriting an equal amount by a merchant

banker associated with that issue under intimation to the SEBI. SEBI provisions also

state that the outstanding underwriting commitment of a merchant banker should not

exceed twenty times of its net worth at any point of time.

Merchant bankers have played a lead role not only in the management of

public issues but also in underwriting of public issues. From the analysis of offer

documents for public issues, multiple merchant bankers have been found to have

underwritten the public issues during the period under review.

Table 5.5 gives the details of the public issues underwritten by Indian and

foreign based merchant bankers operating in India.

Table 5.5

Public Issues Underwritten by Indian and Foreign Lead Merchant Bankers Amount in Rs. crore)

Year Indian Merchant Banks

Foreign Merchant Banks

Total

Amount % Amount % Amount % of total 1997-98 201.00 74.8 31.24 11.7 232.24 86.48 1998-99 103.60 65.4 9.60 6.0 113.20 71.42 1999-00 1,264.22 58.6 808.10 37.4 2,072.32 96.00 2000-01 1,308.47 84.8 194.08 12.6 1,502.55 97.44 2001-02 74.00 8.1 834.52 91.9 908.52 100 2002-03 107.85 42.4 146.97 57.6 254.82 100 2003-04 7,039.67 42.7 9,445.55 57.3 16,485.22 100 2004-05 7,859.30 37.4 10,928.11 51.9 18,787.41 89.34 2005-06 11,082.49 49.5 10,420.04 46.5 21,502.53 96.00 2006-07 9,282.03 38.4 12,466.18 51.6 21,748.21 90.00 2007-08 25,558.87 50.5 23,810.00 47.05 49,369.34 97.55 2008-09 1,574.35 80.32 138.44 7.06 1,712.79 87.39 Total 65,455.85 46.12 69,233.30 48.77 1,34,689.15 94.89

Source: - Compiled from offer documents of companies, Prime Directories of various years.

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Table 5.5 provides year wise information on the amount and percentage share

of total amount underwritten by Indian and foreign based merchant bankers. A total of

134,689.15 crore of equity amount was underwritten by lead merchant bankers in

India during the priod of study. This amount stood at 94.89% of the total amount of

Rs. 1,41,937.65 crore underwritten during the period under review. Out of this, an

aggregate amount of Rs. 65,455.85 crore (46.12%) was underwritten by Indian

merchant bankers, while the share of foreign merchant bankers stood at Rs. 69,233.30

crore (48.77%) during the period from 1997-98 to 2008-09. As visible from the table,

Indian merchant bankers were ahead in providing underwriting services in public

issues during first four years of period under study. However, from 2001-02 onward,

proportionate share of Indian merchant bankers declined and they were superseded by

foreign merchant bankers. The Indian merchant bankers again dominated in the year

2007-08 and 2008-09. Indian merchant bankers were able the secure the business of

50.5% and 80.32% of the total amount underwritten during 2007-08 and 2008-09

respectively. However, bearish trend in primary market and small sized equity issues

in 2008-09 kept the foreign merchant bankers away from the underwriting activities.

Total amount underwritten by Indian and foreign merchant banks during the

period from 1996-97 to 2008-09 has also been shown in the following chart

Chart 5.3

Total Amount Underwritten by Indian and Foreign Merchant Bankers

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5.3.3.1 Public Issues Underwritten by Indian Merchant Bankers Table 5.5A exhibits year wise amount of public issues underwritten by

individual lead managers. As revealed in the table, Kotak Mahindra Capital Co. Ltd

has underwritten maximum amount of public issues floated in each year. It has been

on the top of the list by performing aggregate underwriting obligations to the tune of

Rs. 20,544.73 crore during the period under review. This amount stood at 14.47 % of

the total amount underwritten.

Enam Financial Services Ltd followed Kotak Mahindra by underwriting Rs.

13,346.35 crore (9.40%). Other prominent lead managers who actively participated in

equity share underwriting included ICICI Securities Ltd with Rs. 13,317.98 crore

(9.38%), IL&FS Merchant Banking Services Ltd. with Rs. 1456.38 crore (1.02%),

Allianz Securities Rs. 1,340.61 crore (0.94%), Karvy Investors (Rs. 832.53 crore) and

Anand Rathi Securities with a total amount of Rs. 823.53 crore.

SBI Capital Markets Ltd underwrote Rs. 5,111.24 crore (9.40%) of public

issues amount floated during the period of study. Other public sector banks or their

subsidiaries which figured in the list of top lead managers as underwriters included

BOB Capital Markets Ltd and Canara Bank with a meagre amount of Rs. 89.30 crore

and Rs. 25.80 crore respectively underwritten during the period of study. Similarly,

IDBI Ltd remained active during the initial years only and was able to underwrite an

amount of Rs. 511.55 crore.

A large number of merchant bankers from the category of other merchant

bankers have been involved in the underwriting of a very tiny amount of public

issues. These merchant banks underwrote a total sum of Rs. 6,301.97 crore during the

entire period of study which stood at just 4.44% of the total amount of equity issues

underwritten during this period.

136

137

Total amount of public issues underwritten by top Indian merchant bankers

during the period under review has also been shown in chart 3.4

Chart 5.4

5.3.3.2 Public Issues Underwritten by Foreign Merchant Bankers

Foreign merchant bankers have not only played prominent role as lead

managers, co managers and advisors to the public issues, but also in underwriting of

public issues during the period under review. Performance of foreign based merchant

bankers with respect to their involvement in the underwriting of equity issues has

been shown in Table 5.5B.

It could be seen from the table that during period of study, equity shares

amounting to Rs. 69,233.30 crore were underwritten by foreign based merchant

bankers. This amount was 48.47 % of the gross amount underwritten. Among the

foreign lead managers, DSP Merrill Lynch has been on the top of the list by securing

underwriting business of Rs. 22,247.94 crore (15.67%). Starting its underwriting

activities in primary market in India from the year 1998-99, its share stood at 41.30%

of the total amount underwritten during the year 2001-02 and 23% in 2003-04.

138

139

Another international investment banker, JM Morgan Stanley closely followed

DSP Merrill Lynch in underwriting activities of public issues. It was able to procure

the underwriting business of Rs. 22,205.40 crores (15.64%) during this period of

study. Citi Group Global and HSBC Securities & Finance (India) Ltd. figured in the

latter part of the period and undertook Rs. 5,699.65 crore (4.01%) and Rs.2,375.36

crore(1.67%) respectively for underwriting the public issues. UBS Securities India

Ltd. and Deutsche Equities India participated in underwriting for three years and

underwrote a sum of Rs. 3,554.11 crore (2.50%) and 3837.89 crores (2.70%)

respectively. ABN Amro Securities could fetch a total business in underwriting of

public issues to the tune of Rs. 2059.69 crore (1.45%%) only. Similarly JP Morgan

India Ltd., though erratic in nature, underwrote public issues amounting to Rs.

2,765.32 crore (1.95%) including Rs. 2009.14 crore in 2007-08.

On the other hand, a sum of Rs. 3,862.27 crore (2.72%) only was underwritten

by other foreign merchant bankers. These merchant banks participated in

underwriting in only one public issue for one year only. These foreign merchant

bankers included Saloman Smith Barney (India) Ltd, Standard Chartered Bank,

Goldman Sach (India) Securities and Weizmann Capital Ltd.

Overall performance of foreign merchant bankers in underwriting activities in

the primary capital market in India has been significant in the latter half of the period

under review during which their proportionate share in total underwriting was

generally above fifty percent. They were able to underwrite 91.90% of the total

amount in 2001-02. However, due to depressed market conditions in 2008-09, foreign

merchant bankers did not participate in underwriting activities.

Chart 5.5 presents the amount of public issues underwritten by foreign

merchant bankers during the period from 1997-98 to 2008-09.

140

Chart 5.5

7.4 Under subscription and Devolvement on Underwriters

During the period of twelve years from 1997-98 to 2008-09, a total of 325

public issues of equity with an aggregate amount of Rs. 1,41,937.65 crore have been

underwritten. The underwritten public issues generally got favourable response from

the public and were oversubscribed. However, a total of five underwritten public

issues were undersubscribed and devolved on underwriters. These public issues have

been listed in table 5.6

Table 5.6

Under Subscription and Devolvement

Year Issuer company Issue size (Rs. crore)

Lead Managers Underwriters

2000-01 Hughes Tele.com 749.21 Kotak Mahindra ICICI Sec. , IDBI, IT&T Ltd. 31.67 JM Morgan,

Enam Financial Services

JM Morgan Enam Financial Services

2001-02 South Asia Petro Chem.

180.00 IDBI, SBI Caps IDBI , Enam financial, SBI Capital Markets,

2006-07 Cairn India Ltd. 5,722.00 DSP Merrill, ABN Amro

ABN Amro, DSP Merrill, JM Morgan, Citigroup

Vijayeswari Textiles Ltd.

90.00 IDBI Capital Services, IL&FS Investsmart Ltd.

IDBI Capital Services IL&FS Investsmart Ltd.

Source: - Compiled from offer documents, Basis of Allotment.

141

Table 5.6 exhibits the list of undersubscribed public issues along with their

lead managers and underwriters. It has been found that lead merchant bankers also

acted as underwriters except one issue (Hughes Tele.com) during 2000-01. During

2000-01, 10% retail book built portion of mega issue of Hughes Tele.com was

subscribed by only 0.15 times although its institutional portion was oversubscribed.

The allocation for the retail book built portion was 1,42,40,400 shares against

9,36,51,400 shares available. The under subscribed portion of 7,94,11,00 shares was

allocated to institutional category. Also the fixed price issue of IT&T Ltd. was

subscribed to 0.994 times and the undersubscribed portion of the issue was devolved

on underwriters.

In 2001-02, one issue out of six public issues, was undersubscribed and its

underwriters, IDBI Ltd., Enam Financial Services and SBI Capital Markets. has to sail

it through.

In the year 2006-07, a poor public response was also found for the 30% retail

portion of mega issue of Cairn India Ltd., which was subscribed only 0.676 times.

This undersubscribed portion was also devolved on the underwriters. Similarly the

retail portion of public issue of Vijayeswari Textile Ltd. was subscribed by 0.216

times and underwriters had to subscribe the unsubscribed portion of this issue.

Conclusion To sum up, underwriting of public issues by merchant bankers has assumed a

great significance and urgency in primary market in India. Even after October, 1994,

when underwriting of public issues were made non mandatory by SEBI, its role has

not come down in Indian capital market. It has contributed positively for the

development of primary market in India by increasing the confidence of both

promoters as well as investors. The first half of the period under study was dominated

by debt issues especially bond issues by ICICI Ltd. and IDBI Ltd. But they did not

prefer to underwrite their debt issues. So underwriting has been limited to the equity

and equity related instruments. More than 90% of amount of public issues of equity

shares was underwritten from the year 2003-04 onward.

Different classes of underwriters have been found to have participated in the

underwriting activities during the period under review. However, private merchant

banks, along with performing the functions of lead managers in the management of

public issues, have also participated actively in the underwriting of public issues.

142

They were able to underwrite 81.48% of the total amount underwritten during the

period under study. Other players in the underwriting of public issues included All

India financial institutions, commercial banks and their subsidiaries and stock

exchange brokers. Every class of underwriters has their own motive and policy of

underwriting.

Active participation of foreign merchant bankers was found in underwriting

activities of public issues of equities. These merchant bankers have been found to

have dominating role after the period starting from 2001-02 and were able to secure

48.77% of total amount underwritten. Indian merchant bankers closely followed

foreign merchant bankers with 46.12% share. Among the foreign merchant banks, JM

Morgan and DSP Merrill Lynch accounted for 31.31% of the total amount

underwritten and have participated during all the years covered in the study.

Top ranking Indian merchant bankers which included Kotak Mahindra Capital

Co., Enam Financial Services and ICICI Securities Ltd together contributed 33.25%

of the total amount underwritten. Among the public sector banks and their

subsidiaries, SBI Capital Markets Ltd has actively participated in the underwriting of

public issues. BOB Capital Markets and Canara Bank also showed their presence in

underwriting activities.

Analysis of public response to underwritten public issues have shown that out

of total 325 equity issues underwritten during the period, only five remained

undersubscribed and devolved on the underwriters.

From the offer documents of underwritten public issues, it has also been found

that syndicate underwriting has been in practice in Indian primary market. A few

small issues have been underwritten by single underwriters. It has also been noticed

that the lead manager(s) to the individual public issue also participated actively as

underwriter in that very particular public issue. So it may be concluded that apart

from shouldering the responsibility of management of public issues, merchant bankers

have also participated actively in the underwriting of public issues.

143

REFERENCES

1. Dolvin Steven, ‘Do Underwriters Create Value for Issuers by Subjectively

Determining Offer Prices?’ Initial Public Offerings - An International

Perspective, (edited), Elsevier, Oxford, 2006.

2. Machiraju, H.R., Merchant Banking- Principles and Practice, New Age

International, New Delhi, 2004. p.227

3. Kuchal, S.C., The Industrial Economy of India, Chaitanya Publishing, 1959.

4. Cirvante, V.R., The Indian Capital Market, Oxford, Bombay, 1956, p.80

5. Ibid, p.81.

136

Table 5.5 A Public Issues Underwritten by Indian Merchant Banks

(Rs. in Crore)

Years

Merchant Banks

Kotak Mahindra ICICI Sec. Enam

Fin. SBI Caps.

IL&FS mer.

Allianz Securities

Karvy Investors

Anand Rathi

UTI Sec. Edelweiss

IDBI Tata Fin.

BOB cap. Market

Canara Bank

Other Indian MBs

Total amount by Indian MBs

Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

1997-98 6.25 (2.3)

- 7.05

(2.6) 9.75 (3.6)

19.75 (7.3) - - - 11.80

(4.4) - 52.00 (19.4)

9.95 (3.7)

13.50 (5.1)

13.75 (5.1)

57.21 (21.3)

201.01 (74.8)

1998-99 - 4.95 (3.1) - - 5.32

(3.3) - - - 4.50 (3.0) - 34.50

(21.7) - - 1.50 52.83* (33.3)

103.60 (65.4)

1999-00 533.84 (24.7)

351.16 (16.0)

116.11 (5.4)

21.51 (1.0)

22.2 (1.0) - 14.71 31.22

(1.4) - - 10.00 22.05 (1.0) - 7.55 133.87

(6.16) 1,264.22

(58.6) 2000-01 481.44

(31.2) 362.12 (23.5)

82.53 (5.30) - 31.81

(2.0) - 22.08 (1.40)

82.6 (5.30) - - 24.97

(1.60) 34.28 (2.2) - - 186.64

(12.6) 1,308.47

(84.8) 2001-02 - - - - - - - - - - 22.5

(2.5) - - 3.00 48.5 (5.28)

74.00 (8.10)

2002-03 85.42 (33.51) - - - 22.43

(8.63) - - - - - - - - - - 107.85 (42.4)

2003-04 4,732.04 (28.7)

1,446.20 (8.8)

406.53 (2.5)

394.47 (2.4) 30.04 - - - - - - - - 30.39 7,039.67

(42.7)

2004-05 3,601.19 (17.1)

2,814.02 (13.4)

852.10 (4.5) 147.74 190.18

(0.9) 143.99 - 17.50 19.50 - - - - - 73.08 7,859.30 (37.4)

2005-06 2,720.58 (12)

1,996.17 (8.8)

2,322.08 (10.2)

1319.09 (5.8)

703.54 (3.1)

249.65 (1.1)

561.64 (2.4)

154.28 (0.6)

205.25 (0.9)

239.61 (1.0) 80.00 - 19.80 510.8

(2.27) 11,082.49

(49.5) 2006-07 1,887.22

(7.8) 1,899.14

(7.9) 2,666.69

(11.0) 858.76 (3.6)

431.11 (1.8)

355.78 (1.4)

116.52

243.52 (1.0)

287.10 (1.2)

251.93 (1.0) 103.20 - 56.00 125.06 9,282.03

(38.4) 2007-08 6,358.31

(12.5) 4,444.22

(8.8) 6,893.26

(13.6) 2,359.92

(4.7) - 442.22 (0.9)

117.58 (.23)

224.21 (.44.0) - 529.89

(1.0) 163.45 (32.0) 4,025.81

(7.95) 25,558.87

(50.5) 2008-09 138.44

(7.06) - - - - 148.97 (7.60) - 69.79

(3.56) - 138.44 (7.06)

20.93 (1.06) - - - 1,057.78

(53.97) 1,574.35 (80.32)

Total 20,544.73 (14.47)

13,317.98 (9.38)

13,346.35 (9.40)

5,111.24 (3.60)

1,456.38 (1.02)

1,340.61 (0.94) (0.58) 823.12

(0.57) 528.15 (0.37)

1,159.87 (0.81)

511.55 (0.36) 66.28 89.30 25.80 6,301.97

(4.44) 65,455.85

(46.12) Note: - Figures in parentheses denote the percentage of amount of public issues underwritten during the respective year. * This amount includes RS. 33.60 crore underwritten by IFCI Ltd. Source: - Compiled from offer documents of companies, Prime directories of various years.

138

Table 5.5 B Public Issues of Equity Underwritten by Foreign Merchant Bankers

(Rs. in crore)

Year

Merchant Bankers JM Morgan

Stanley DSP

Merrill HSBC Sec. & finance

City Group Global

ABN Amro Securities

UBS Sec. India

Deutsche Equities

JP Morgan India

CLSA India

Peregrime Capital

Others MBs.

Total amount Underwritten by ForeignMBs

Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

1997-98 - - - - - - - - - 24.99 (9.3)

6.25 (2.3)

31.24 (11.7)

1998-99 - 6.45 (4.0) - - - - - 3.15

(2.0) - - - 9.6 (6.0)

1999-00 343.50 (15.8)

428.12 (19.8) - - - - 2.03 - - 34.45

(1.5) 808.1 (37.4)

2000-01 123.64 (8.0)

45.92 (3.0) 7.02 - - - 5.00 - - 12.5 194.08

(12.6) 2001-02 375.31

(41.3) 375.81 (41.3) - - 83.40

(9.14) - - - - - 834.52 (91.9)

2002-03 62.99 (24.0)

31.49 (12.20) - - - - - - - - 52.49*

(20.7) 146.97 (57.6)

2003-04 4,492.29 (27.2)

3,789.24 (23.0)

1137.46 (6.9) 26.56 - - - - - - -

9,445.55 (57.3)

2004-05 4,484.78 (21.30)

4,580.87 (21.8)

316.55

316.55 (1.5) -

316.55 (1.5)

316.55 (1.5)

542.05 (2.7) 54.21 - -

10,928.11 (51.9)

2005-06 4,624.13 (20.4)

4,475.38 (19.7)

421.37 (1.9)

549.53 (2.4)

200.00 (0.8) - - -

149.63 (0.6) - -

10,420.04 (46.5)

2006-07 3,773.18 (15.6)

4,010.80 (16.6)

492.96 (2.0)

1,282.81 (5.3)

1,776.29 (7.4)

478.35 (1.9)

447.84 (1.8)

203.95 (0.8) - - -

12,466.18 (51.6)

2007-08 3,925.58 (7.76)

4,503.86 (8.9) -

3,524.20 (6.96) -

2,759.21 (5.4)

3,073.50 (6.1)

2,009.14 (4.0)

396.84 (0.78) -

3,618.14 (7.15)

23,810.47 (47.05)

2008-09 - - - - - - - - - - 138.44 (7.06)

138.44 (7.06)

Total 22,205.40 (15.64)

22,247.94 (15.67)

2,375.36 (1.67)

5,699.65 (4.01)

2,059.69 (1.45)

3,554.11 (2.50)

3,837.89 (2.70)

2,765.32 (1.95)

600.68 (0.42) 24.99

3,862.27 (2.72)

69,233.30 (48.47)

Note: - Figures in parentheses denote the percentage of amount of public issues of equity underwritten during the respective year. * This amount was underwritten by Saloman Smith Barney (India) Ltd. Source: - Compiled from offer documents of companies, SEBI website and Prime Directories of various years.