Underwriting (Investment banking)

1. Underwriting
Dr. Anu Thakur

2. Underwriting
“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.”
u/w “A person who engages in the business of underwriting of an issue
of securities of a body corporate.”

3. Underwriting
• The specific underwriting commitment must be documented through
an underwriting agreement.
• Underwriting is an agreement by the underwriter to subscribe to the
securities being issued in case the persons to whom they are offered
do not subscribe to them.
• Underwriting is primarily a fee-based service provided by an
Underwriter.
• Underwriting requires sufficient financial resources to be allocated to
such activity.

4. Sub-Underwriting
• Sub-Underwriting is used by an Underwriter to spread the risk
assumed in underwriting an issue of shares.
• It is a process under which the underwriter appoints other people to
underwrite his/her own underwriting obligation.
• Sub-underwriter has the same obligation to the underwriter as the
underwriter has to the issuer company.
• Shares the underwriting fee.
• Sub-underwriting agreement.

5. Underwriting Commission
• Underwriting Commission, is paid as a % of the value of underwriting
(the total number of securities underwritten multiplied by the offer
price per security).
• SEBI regulations do not prescribe any ceiling on issue and
underwriting costs.

6. Underwriting Agreement
The underwriting agreement is the document that establishes the
contract between the u/w and the issuer company. u/w agreement
should contain following main provisions:
• Amount being underwritten
• Provision for sub-underwriting
• Computation of devolvement
• Procedure for discharge of underwriting obligations
• Right to receive commission as per agreed terms
• Statutory declarations

7. Regulatory Framework
Regulated under the SEBI (Underwriters) Regulations 1993 as amended
from time-to-time.
• Underwriting business can be taken by FIs, banks, mutual funds,
investment bankers registered with SEBI, stock-brokers and NBFCs.
• All underwriters shall have necessary infrastructure, experience,
minimum 2 employees and comply with minimum capital adequacy
requirements.
• U/w must enter into legally binding agreements with the issuer
company.
• U/w commissions will be as per the terms of U/w agreement.

8. Regulatory Framework
u/w should also comply with a Code of conduct, following main
provisions:
• Underwriters should avoid conflict of interest and make necessary
disclosure of their interests, if any.
• An underwriter should stand by the award of the Ombudsman in case
of disputes.
• Underwriters or their employees, directors, etc., cannot indulge in
insider trading in the securities they underwrite.
• Underwriters or their employees shall not render directly or
indirectly, any investment advice publicly about the security unless a
disclosure of interest has been made.

9. Devolvement
The amount of financial support to be provided by an underwriter in an under-
subscribed issue is know as devolvement.
Methods of computation recommended by SEBI:

10. SUM 1:
ABC ltd. makes an issue of 10,000 shares of Rs. 10 each at par
aggregating to Rs. 1,00,000. The issue has been underwritten fully by
an underwriter X. The issue has been closed and the following is the
information available on the subscriptions.
Valid subscriptions received – Rs. 76,500
Received through underwriter X – Rs. 62,300
Direct subscriptions received – Rs. 14,200
Examine the underwriters’ devolvement.

11. Underwriters’ devolvement
Valid subscriptions received – Rs. 76,500
Received through underwriter X – Rs. 62,300
Direct subscriptions received – Rs. 14,200
Total Underwritten = Rs. 1,00,000
Received through underwriter X = Rs. 62,300
Direct subscriptions received = Rs. 14,200
Devolvement amount = Rs. 23,500

12. Underwriters’ devolvement
Valid subscriptions received – Rs. 76,500
Received through underwriter X – Rs. 62,300
Direct subscriptions received – Rs. 14,200
Total Underwritten = Rs 1,00,000
Received through underwriter X – (Rs. 62,300)
Direct subscriptions received – (Rs. 14,200)
Devolvement amount = Rs. 23,500

13. SUM 2:
ABC ltd. makes an issue of 10,000 shares of Rs. 10 each at par
aggregating to Rs 1,00,000. the issue has been underwritten fully by 2
underwriters X and Y to the extent of Rs. 50,000 each. The issue has
been closed and the following is the information available on the
subscriptions.
Valid subscriptions received – Rs. 76,500
Received through u/w X – Rs. 27,500
Received through u/w Y – Rs. 34,800
Direct subscriptions received – Rs. 14,200
Examine the underwriters’ devolvement.

14. Valid subscriptions received – Rs. 76,500
Received through u/w X – 27,500
Received through u/w Y – 34,800
Direct subscriptions received – 14,200
Total shares for offer = Rs. 1,00,000
Valid subscriptions received = Rs. 76,500
Total devolvement = Rs. 23,500 (Rs. 15,400 + Rs. 8,100)
X Y
Total u/w Rs. 50,000 Rs. 50,000
- Valid subscriptions (Rs. 27,500) (Rs. 34,800)
- Direct subscriptions
(14,200)
(Rs. 7,100) (Rs. 7,100)
Devolvement Rs. 15,400 Rs. 8,100

15. Valid subscriptions received – Rs. 76,500
Received through u/w X – 27,500
Received through u/w Y – 34,800
Direct subscriptions received – 14,200
Total shares for offer = Rs. 1,00,000
Valid subscriptions received – Rs. 76,500
Total devolvement = 23,500
X Y
Total u/w Rs. 50,000 Rs. 50,000
- Valid subscriptions (Rs. 27,500) (Rs. 34,800)
- Direct subscriptions
(14,200)
(Rs. 7100) (Rs. 7100)
Devolvement (Rs. 15,400) (Rs. 8,100)

16. SUM 3
ABC ltd. makes an issue of 15,000 shares of Rs. 20 each at par
aggregating to Rs 3,00,000. the issue has been underwritten fully by 2
underwriters X and Y to the extent of Rs. 1,50,000 each. The issue has
been closed and the following is the information available on the
subscriptions.
Valid subscriptions received = Rs. 2,82,000
Received through u/w X = 1,50,000
Received through u/w Y = 1,20,000
Direct subscriptions received = 12,000
Examine the underwriters’ devolvement.
-6000; 24,000-6000 = Rs. 18,000

17. SUM 4:
ABC ltd. makes an issue of 10,000 shares of Rs. 10 each at par aggregating to
Rs 1,00,000. the issue has been underwritten fully by 4 underwriters P, Q, R
and S to the extent of Rs. 20,000, 30,000, 35,000 and Rs. 15,000,
respectively. The issue has been closed and the following is the information
available on the subscriptions.
Valid subscriptions received – Rs. 76,500
Received through u/w P – 11,700
Received through u/w Q – 22,400
Received through u/w R – 8,300
Received through u/w S – 22,600
Direct subscriptions received – 11,500
u/w commission 2.5% on subscription received and 2% on Devolvement.
Examine the underwriters’ devolvement and the commission receivable by
each of them.

18. Total shares for offer = Rs. 1,00,000
Valid subscriptions received = Rs. 76,500
Total devolvement = Rs. 23,500
20:30:35:15 4:6:7:3 = 20 4:6:7 =17
P Q R S
Valid subscriptions 11,700 22,400 8,300 22,600
2.5% u/w
commission
292.5 560 207.5 565
Net Devolvement 3,800 860 18,840 0
2% on dev. 76 17.2 376.8
Total Commission 292.5 + 76 560 + 17.2 207.5 + 376.8 565

19. Total shares for offer = Rs. 1,00,000
Valid subscriptions received – Rs. 76,500
Total devolvement = 23,500
20:30:35:15 4:6:7:3 =20 4:6:7 = 17
P Q R S
Total u/w 20,000 30,000 35,000 15,000
- Valid subscriptions 11,700 22,400 8,300 (22,600)
- Direct
subscriptions
(11,500)
4:6:7:3
2,300 3,450 4,020 (1,730)
Gross Devolvement
- (Negative balance
of S) Rs. 9,330
4:6:7
Net Devolvement
6,000
(2,200)
3,800
4,150
(3,290)
860
22,680
(3,840)
18,840
(9,330)
9,330
0

20. SUM 5
ABC ltd. makes an issue of 15,000 shares of Rs. 20 each at par aggregating to Rs
3,00,000. the issue has been underwritten fully by 4 underwriters A, B, C and D to
the extent of Rs. 70,000, 75,000, 1,05,000 and Rs. 50,000, respectively. The issue
has been closed and the following is the information available on the subscriptions.
Valid subscriptions received – Rs. 2,82,000
Received through u/w A – Rs. 60,000
Received through u/w B – Rs. 85,000
Received through u/w C – Rs. 90,000
Received through u/w D – Rs. 35,000
Direct subscriptions received – 12,000
u/w commission 2.5% on subscription received and devolvement 2%.
Examine the underwriters’ devolvement and the commission receivable by each
of them.
Ans: A = 3,156; B = zero; C = 4,734; D = 10,110

21. Devolvement Notice
1. The issuer company shall within 30 days after the date of closure of
subscription, list communicate in writing to the underwriter
(Devolvement Notice), the total remaining unsubscribed securities.
2. The underwriter on being satisfied about the extent of
devolvement, within 30 days after the receipt of notice, make
application to the securities and submit along with the required
payment to the company.
3. In case of failure, the company shall free to make alternative
arrangement.

22. Underwriting Business Model
u/w business as compared to DIM.
The business model is fraught with risks.
They develop an extensive network of sub-underwriters, brokers and
distribution agents to market the securities underwritten by them.
(example 4).
U/w firm’s first objective is to be safe position by covering the
underwriting obligation (no devolvement)
Drivers to a viable u/w business model:
• Net worth of the u/w since it determines the volume of the business.
• The amount of devolvement, the capital losses.

23. Underwriting in Fixed Price Offers
• u/w is Optional for a fixed price offer.
• If the issuer company feels so the issue is strong enough, it may
decide to take risk and not to go with underwriting option.

24. Underwriting in Book-built Offers
• Compulsory

25. THANK YOU