Underwriting of shares by Ruby Sharma

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Underwriting of shares by Ruby Sharma

  1. 1. UNDERWRITING OFSHARES1 Ruby Sharma
  2. 2. UNDERWRITING OFSHARES “Underwriting" means an agreement with orwithout conditions to subscribe to the securitiesof a body corporate when the existingshareholders of such body corporate or the publicdo not subscribe to the securities offered to them. Underwriting of shares is a guarantee orinsurance given by the underwriter to thecompany that the shares offered to the public willbe subscribed in full. Underwriters are the person or institutionunderwriting the public issue of share. Theyensure the company that in case the shares thatare offered to the public are not subscribed by thepublic to the extent, the balance of shares will betaken up by them.2 Ruby Sharma
  3. 3. TYPES OF APPLICATION FORMS Marked application : application formsreceived by the company stamped in thename of underwriter are called markedapplication. Unmarked application : application formsreceived by the company without the name ofunderwriter are called unmarked application.3 Ruby Sharma
  4. 4. UNDERWRITINGCOMMISSION It is the consideration which is payable to theunderwriters for underwriting the shares of thecompany . This commission is paid at a specifiedrate on the issue price of the shares underwritten. Underwriting commission:An underwriter should have a minimum net worthof Rs.20 lakes, and his total obligation at any timeshould not exceed 20 time the underwriter’s networth.4 Ruby Sharma
  5. 5. Nature of issue On amountdevolving onunderwritersOn amountssubscribed bypublicEquity shares, preference Share anddebenture2.5% 2.5%Issue amount upto Rs. 5lakes2.5% 1.5%Issue amount exceeding Rs. 5 Lakes2% 1%5 Ruby Sharma
  6. 6. PAYMENT OFUNDERWRITING Articles must authorize the payment of suchcommission. Rate should not exceed 5% of issue price ifshares or the amount authorize by the Articleswhichever is less The commission agreed to be paid must bedisclosed in the prospectus. Number of shares which underwriters haveagreed to subscribe should be disclosed in theprospectus. A copy of contract regarding the paymentof commission should be delivered to theRegistrar. The commission is only payable if the shares areoffered to the general public.6 Ruby Sharma
  7. 7. The 3 main types of underwritingagreements are: i) Complete underwriting. If the whole issue of shares ordebentures of a company is underwritten, it is calledcomplete underwriting. In such a case the whole issue isunderwritten either by an individual/institution agreeing totake the entire risk or by a number of firms or institutionseach agreeing to take the risk to a limited extent. ii) Partial underwriting. If part of the issue of shares ordebentures of a company is underwritten, it is said to bepartial underwriting. In such a case the part of the issue isunderwritten either by an individual/institution or by anumber of firms or institutions each agreeing to take therisk to a limited extent. iii) Firm underwriting. Firm underwriting means when anunderwriter agrees to buy a definite number of shares ordebentures in addition to the shares or debentures he hasto take under the underwriting agreement. In case of firmunderwriting the underwriters get issue is oversubscribed, the underwriters are liable to take up the7 Ruby Sharma
  8. 8. Disclosure Requirements: The provisions of the Companies Act, 1956 regardingdisclosure of underwriting agreement are as follows: 1. Disclosure in the Prospectus. Where any issue of sharesor debentures is underwritten, the names of the underwritersand the opinion of the directors that the resources of theunderwriters are sufficient to discharge their obligations shouldbe specified in the prospectus. As per provisions of Section 76of the Companies Act, 1956, the number of shares ordebentures which the underwriters have agreed to subscribealong with the amount or rate of commission payable to themshould be disclosed in the prospectus or statement in lieu ofprospectus, as the case may be. 2. Disclosure in Statutory Report. It shall set out the extent,if any, to which each underwriting contract, if any, has not beencarried out and the reasons therefore. 3. Disclosure of sums payable. All sums payable bycommission and brokerage etc. must be disclosed in theBalance Sheet, under the heading Miscellaneous Expenditureas per requirements of Schedule VI of the Companies Act.8 Ruby Sharma
  9. 9. Consolidated SEBI guidelines forDisclosure and investor protection Full underwriting made mandatory: SEBIhas also made underwriting compulsory for the fullissue. If the issuing company does not receive aminimum 90%of the public offer plus and theaccepted devolvement from underwriters within 120days from the date of opening of the issue, thecompany shall have to refund the entire amountof subscription .In case of the disputed devolvement,the company should refund the subscription if theabove conditions are not met. Earlier SEBI had made underwriting compulsory forthe full issue butrecently underwriting has been made optional for the issuer companies.9 Ruby Sharma
  10. 10. Advantages of underwriting Underwriting undertake to guarantee the whole orpart of the issued shares as they would not be takenup by the public. Therefore the companies issuingsecurities are relieved from the tension of marketingof securities and of uncertainties in the market. Underwriters help the companies in fulfilling thestatutory regulation of minimum subscription. Underwriters give guarantee to adequacy of capitaland help companies in raising capital.10 Ruby Sharma
  11. 11.  Investors believe in the issue of securities, if it isguaranteed by reputed underwriters.Underwriters assure a quick sale of securitiesin the market.An underwriter stimulates industrialdevelopment and creates more employmentopportunities in the country.11 Ruby Sharma
  12. 12. Limitations of underwriting Underwriting is very costly method of marketing of securities. Issuing company has to provide secret informationabout its affairs to the underwriters and misuse ofsuch information is possible. Underwriter may secure control on the company byvirtue of purchasing large number of shares notpurchased by the investing class.12 Ruby Sharma

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