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UNDERWRITING
• A marketing strategy corporate enterprises are able to sell their securities to the public
• Agreement between the issuing company & the financial intermediary, whereby sale of certain quantum of securities is guaranteed for the issuing company.
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Underwriting Types
• Firm Underwriting: Underwriter agrees to take up a specified number of securities
• Sub-Underwriting: Underwriting of securities is contracted out by the main underwriter to other underwriting intermediaries for a commission.
• Joint Underwriting: Securities underwritten by two or more underwriting intermediaries jointly.
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Underwriting Agencies
• Private Agencies: M/s Dalal and Co., M/s Kothari & Co. etc
• Investment Companies: Industrial Investment Trust of Bombay, Devkaran Nanji Investment Co. and Investment Trust of India Ltd.
• Commercial Banks
• DFI’s: LIC, IFCI, ICICI, IDBI, UTI etc.
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Underwriter
Factors to be taken into consideration while selecting underwriter:
Financial StrengthExperience in primary MarketPast underwriting performance & defaults
if anyOverall reputation of the underwriter.
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Factors to be taken into consideration while selecting the
company Company’s standing & record Competence of the management, Objectives of the issue project details offer price other terms of the issue etc.
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SEBI Guidelines
Optional: Issue is not underwritten & 90 percent of the amount is not collected, amount will be refunded.
Number of underwriters: Lead Manager must satisfy themselves about the net worth of the underwriters & outstanding commitments & disclosing the same to the SEBI.
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• Registration: Underwriting firm must registered with SEBI & having a minimum net worth of Rs.20 Lakh.
• Obligations: Should not exceed 20 times an underwriters networth.
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Underwriting Commission
• No underwriting commission is payable on the amount taken up by promoters, employees, directors and their friends & Business associates.
• Commission is to be paid within 15 days of finalization of allotment.
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Underwriting Commission
• In case of equity shares, 2.5% commission on the amount devolving on underwriter & amount subscribed by the public.
• In respect of preference, Convertible & Non-Convertible Debentures
a) Underwriting upto Rs.5lakh, 2.5% comm. on the amount devolved by the underwriter & 1.5% on the amount subscribed by the public.
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b) Underwriting exceeding Rs.5lakh, 2%comm. For the amount devolving on underwriter & 1% on the amount subscribed by the public.