Underwriting: Underwriting is an agreement whereby the underwriter promises to subscribe to a specified number of shares or debentures or a specified amount of stock

k in the event of public not subscribing to the issue. If the issue is fully subscribed then there is no liability for the underwriter. If a part of share issues remain unsold, the underwriter will buy the shares. Thus underwriting is a guarantee for the marketability of shares. Method of underwriting An underwriting agreement may take any of the following three forms: 1. Standing behind the issue the underwriter guarantees the sale of a specified number of shares within a specified period. If the public do not subscribe to the

specified amount of issue, the underwriter buys the balance in the issue. 2. Outright purchase The Underwriter, in this method, makes outright purchase of shares and resell them to the investors 3. Consortium method Underwriting is jointly done by a group of underwriters in this method. The underwriters form a syndicate for this purpose. This method is adopted for large issue. Advantages of underwriting 1. The issuing company is relieved from the risk of finding buyers for the issue offered to the public. The company is assured of raising adequate capital.

2. The company is assured of getting minimum subscription within the stipulated time, a statutory obligation to be fulfilled by the issuing company. 3. Underwriters undertake the burden of highly specialized function of distributing securities. 4. Provide expert advice with regard to timing of security issue, the pricing of issue, the size and type of securities to be issued etc. 5. Public confidence on the issue enhances when underwritten by reputed underwriters.

The underwriters in India may be classified into two categories : Institutional underwriters Non institutional underwriters. The institutional underwriters are

Life Insurance Corporation of India (LIC) Unit Trust of India (UTI) Industrial Development Bank of India (IDBI) Industrial Credit and Investment Corporation of India (ICICI) Commercial banks and general insurance companies. The non-institutional underwriters are brokers.

Distribution
Distribution is the function of sale of securities to ultimate investors. This service is performed by brokers and agents who maintain regular and direct contact with the ultimate investors.

Methods of floating of new issues The various methods which are used in the floating of securities in the new issue market are : Public issues Offer for sale Placement Rights issues

Public issues Under this method, the issuing company directly offers to the general public / institutions a fixed number of shares at a stated price through a document called prospectus. This is the most common method followed by join stock companies to raise capital through the issues of securities. 1. Name of the company 2. address of the registered office of the company 3. existing and proposed activities 4. location of the industry 5. names of directors 6. authorized and proposed issue capital to the public 7. dates of opening and closing of the subscription list 8. minimum subscription

9. Names of brokers/underwriters/bankers/managers and registrars to the issue. 10. A statement by the company that it will apply to stock exchange for quotations of its shares. According to the companies act, 1956 every application form must be accompanied by a prospectus. Now, it is no longer necessary to furnish a copy of the prospectus along with every application forms as per the companies Amendment Act, 1988. Now, an abridged prospectus is being annexed to every share application form. Merits of issue through prospectus 1. Sale through prospectus has the advantage of inviting a large section of the investing public through advertisement. 2. It is a direct method and no intermediaries are involved in it. 3. Shares, under this method, are allotted to a large section of investors on a non-discriminatory basis. This procedure helps in wide dispersion of shares and to avoid concentration of wealth in few hands. Demerits 1. It is an expensive method. The company has to incur expenses on printing of prospectus, advertisement, banks commission, underwriting commission, legal charges, stamp duty, listing fees and registration charges. 2. This method is suitable only for large issues. Offer for sale The method of offer of sale constitute outright sale of securities through the intermediary of issue houses or share brokers. In other words, the shares are not offered to the public directly. This method consist of two stages : the first stage is a direct sale by the issuing company to the issue house and brokers at an agreed price. In the second stage, the intermediaries resell the