Underwriting involves guaranteeing that shares offered to the public will be fully subscribed. Venture capital firms provide funding to start-ups and become involved in management. They aim to reduce information problems through long-term focus, board representation, staged funding, and diversification. Private equity buyouts involve taking public companies private to avoid regulation and attract talent while pursuing tax advantages.

1. Underwriting –Venture capital-Microfinance
Underwriting: Concept – Devolvement - Business model - Underwriting in
fixed price offers
and book built offers.
Venture Capital: Concept, features, Origin and the current Indian
Scenario. Private equity-
Investment banking perspectives in private equity
Microfinance: The paradigm - NGOs and SHGs - Microfinance delivery
mechanisms - Future
of micro finance
Module 5

2.  Underwriting:
Underwriters:
Another important intermediary in the new issue /primary market
is the underwriters to issues of capital who agree to take up
securities which are not fully subscribed. They make a
commitment to get the issue subscribed which are not fully
subscribed.
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.
Underwriting of shares is a guarantee or insurance given by the
underwriter to the company that the shares offered to the
public will be subscribed in full
Underwriters are the person or institution underwriting the public

3. Registration
 To act as underwriter, a certificate of registration must be
obtained from the SEBI. A SEBI registered merchant
banker/broker would not require a separate registration.
The procedure for initial as well as permanent registration
and the application/registration fee applicable to merchant
bankers is also applicable to underwriters.
 In granting the certificate of registration,The SEBI
considers all matters relevant relating to the underwriting
and in particluar
1. The necessary infrastructure like adequate office space,
equipment and manpower to effectively discharge the
activities
2. Past experience in underwriting /employment of at least
two persons with experience in underwriting.
3. Any person directly/indirectly connected with the
applicant is not registered with the SEBI as underwriter
or a previous application of any such person has been
rejected or any disciplinary action has been taken
against such person under the SEBI act/rules and

4.  Capital adequacy requirement of not less than 20
lakh- it is specified by the stock exchange.
 The applicant or the director has been convicted
,if found guilty of any economic offence and is a
fit and proper person.

5. General obligations and
responsibilities
 Code of conduct for underwriters- an underwriter
should :
1. Make all efforts to protect the interest of its
clients.
2. Maintain high standards of integrity dignity and
fairness in the conduct of its business
3. Ensure ethical dealings in all the business he/
she does
4. Maintaining high standards in terms of service
quality to be rendered to customers at all level
5. Avoid conflict of interest and make adequate
disclosure of his interest.

6. 6 Not discriminate among its clients, save and
except on ethical and commercial
considerations.
7 Maintain an appropriate level of knowledge and
competency abide by the provisions of the SEBI
act, regulations , circulars and guidelines issued
by the SEBI. The underwriter should also
comply with the award of the ombudsman under
the SEBI regulations 2003.
8 Not to make any untrue statement.

7. Underwriting in fixed price offers
An issuer company is allowed to freely price the
issue. The basis of issue price is disclosed in the
offer document where the issuer discloses in
detail about the qualitative and quantitative
factors justifying the issue price. The Issuer
company can mention a price band of 20% (cap
in the price band should not be more than 20% of
the floor price) in the Draft offer documents filed
with SEBI and actual price can be determined at
a later date before filing of the final offer
document with SEBI / ROCs.

8. Venture capital
 These firms provide funds for
start-up companies
 Often become very involved with firm
management and provide expertise

9. Venture Capital Firms
 Description of Industry
 Typically limited partnerships
 Examples of venture-backed firms include Apple
Computer, Cisco Systems, Starbucks, TCBY, etc.
 Table on next slide shows the level of venture
involvement in companies over the last seventeen
years.

10. 23-10
Venture Capital Investments

11. Venture Capitalists Reduce Asymmetric
Information
 Managers of start-ups may have objectives that
differ significantly from profit maximization.
 Venture capitalists can reduce this information
problem in several ways
 Long-term motivation
 Sit on the board of directors
 Disburse funds in stages, based on required results
 Invest in several firms, diversifying some risk

12. Origins of Venture Capital
 First U.S. venture capital firm was established
in 1946.
 Most venture capital firms in the 1950s and 1960s
funded development in oil and real estate.
 Funding has shifted from wealthy individuals to
pension funds / corporations. This is one
of the few risky investments pension funds
are permitted.

13. Structure of Venture Capital Firms
1. Most are limited partnerships
2. Source of capital includes wealthy individuals,
pension funds,
and corporations
3. Investors must be willing to wait years before
withdrawing money

14. Life of Venture Capital Deal
1. Fundraising
 Venture firm solicits commitments, usually less than
100 per deal
2. Investment phase
 Seed investing
 Early stage investing
 Later stage investing
3. Exit
 Usually IPO as merger

15. Copyright © 2009 Pearson Prentice Hall. All rights reserved. 23-15
Private Equity Buyouts
 In this situation, a public company (or perhaps a
division) is taken private. For example, in mid-2007,
Thompson Corp. (NYSE: TOC) sold its Thompson
Learning division to Apax Partners and OMERS
Capital Partners in a private equity buyout. The price
tag? $7.76 billion in cash!

16. Copyright © 2009 Pearson Prentice Hall. All rights reserved. 23-16
Private Equity Buyouts
 Why go private?
 Avoid SEC regulation, such as Sarbanes-Oxley.
 Provides flexibility and ability to avoid public scrutiny of
earnings. Also helps attract top talent no longer
interested in the life of a public-company CEO.
 Tax advantages, and high compensation for partners.

17. Copyright © 2009 Pearson Prentice Hall. All rights reserved. 23-17
Private Equity Buyouts
 Implications of the Ownership Structure
 High risk and high returns are involved, as can be seen
in the next slide.
 As the market for underperforming firms becomes more
competitive, PE may not perform as well, or industry will
shrink.