Under Writing of Shares and Debentures

Underwriting is an agreement, with or without conditions, to subscribe to the securities of a body corporate when existing shareholders of the corporate or the public do not subscribe to the securities offered to them. When a company goes in for an Initial Public Offer (IPO), it may face certain uncertainty about whether its Offer of shares or other securities will be subscribed in full or not. If the public issue does not get fully subscribed, the project for which the funds are being raised cannot be implemented. As per law, it is required that if the company is not able to collect 90% of the offer amount, then it needs to compulsorily return the money to those who have subscribed to the shares.

To avoid the risk of under-subscription companies may seek the help of a specialized group of risk- redeemers called Underwriters. The function of the Underwriters is to arrange subscription of floated shares. If the whole or a certain portion of the shares or debentures of the company are not applied for by the public, the underwriters themselves apply or persuade others to apply for those shares or debentures. The underwriters, as risktakers, are entitled to get commission at prescribed rates.

It can be easily comprehended that when the floated shares are likely to be under-subscribed, the underwriters come to the forefront. In other cases they remain in the background, acting as catalysts arranger of sale to the investing public.

Before entering into an agreement with the company, the underwriters assess the following:

a. worth of the public issue;

b. Market response to the issue; and

c. Their own ability to get the issue fully subscribed

Depending upon the risk assessment of the issue, the underwriters decide on their amount of commission. Owing to under-subscription, if the issue devalues upon them, the underwriters pay up the required amount and deduct their commission from that. From the viewpoint of the issuer company, the following are generally observed:

(a) While selecting underwriters and finalizing underwriting arrangements, lead merchant bankers shall ensure that the underwriters do not overexpose themselves so that it may become difficult to fulfill underwriting commitments.

(b) The overall exposure of underwriter(s) belonging to the same group or management in an issue shall be assessed carefully by the lead merchant banker.

(c) The lead merchant banker shall satisfy themselves about the ability of the underwriters o discharge their underwriting obligations.

(d) The lead merchant banker shall:

· incorporate a statement in the offer document to the effect that in the opinion of the lead merchant banker, the underwriters’ assets are adequate to meet their underwriting obligations;

· (ii) Obtain underwriters’ written consent before including their names as underwriters in the final offer document.

(e) In respect of every underwritten issue, the lead merchant banker(s) shall undertake a minimum underwriting obligation of 5% of the total underwriting commitment or ` 25 lacs whichever is less.

(f) The outstanding underwriting commitments of a merchant banker shall not exceed 20 times its Net worth any point of time.

(g) In respect of an underwritten issue, the lead merchant banker shall ensure that the relevant details of underwriters are included in the offer document.

It should be noted that as per the latest SEBI Guidelines underwriting is not mandatory. Under the SEBI rules, no person other than a share broker or merchant banker can act as underwrite unless he holds a certificate granted by SEBI. Regarding underwriting, the following disclosures should be made in the Offer Document:

Ø Names and addresses of the underwriters and the amount underwritten by them.

Ø Declaration by board of directors of the issuer company that the underwriters have sufficient resources to discharge their respective obligations.