UNDERWRITING

Pranav Sharma
 Meaning of Underwriting

“ Underwriting is an agreement
entered i n t o before the
s h a r e s are b o u g h t b y t h e
public t h a t in t h e e v e n t
o f t h e public n o t taking u p
t h e whole of t h e m t h e
u n d e r w r i t e r will t a k e an
allotment o f s u c h part o f
t h e s h a r e s a s the public
has n o t applied for.”

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 Need For Underwriting

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. As per SEBI Guidelines 14(4)(b) , 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 and causing lot of issue expenses to go
waste. This uncertainty could be avoided by the help
of a specialised group of risk-redeemers — called
Underwriters.

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Underwriter V/S Broker

The persons or institutions

A person who buys and sells
underwriting a public issue of shares
things for other people is called
or
'Broker'.
debentures are called “Underwriter”
Brokers merely promise or try to
Underwriters give the guarantee to
procure subscriptions to the
procure subscriptions to the
shares or debentures issued; they
shares or debentures issued, they take
do not take any
responsibility of subscribing.
responsibility of subscribing.
If whole of the issue is not subscribed
by the public, underwriter is Broker is not liable to take any
liable to take the balance of the shares shares or debentures.
or debentures.
Remuneration paid to the underwriter
Remuneration paid to the broker
is known as “Underwriting
is known as “Brokerage”.
Commission”

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Underwriting Commission

It may be paid in cash or in fully paid-up shares

or debentures or a combination of
all these.
Companies Act, 2013 provides that payment of
commission should be authorized by Articles of In case of shares
5% of the issue
price of the shares
Association and the maximum commission
payable will be as under:
 Underwriting commission is not payable on the
amounts taken up by the promoters,
employees, directors, their friends and business In case of
2 % of the issue
price of the
associates. debentures
debentures
 Commission is payable on the whole issue
underwritten irrespective of the fact that
whole of the issue may be taken over by the
public.
 Commission is calculated on issue price unless
otherwise mentioned.
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TYPES OF UNDERWRITING

Underwriting

Complete Partial Syndicate Firm

Underwriting Underwriting Underwriting
Underwriting

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• Complete Underwriting : If the whole of the issue of shares or debentures of a
company is underwritten, it is to be said as “complete underwriting”. In such a case the
whole of the issue of shares or debentures may be underwritten by firm or person who
has agreed to take the risk.
• Partial Underwriting: - If only a part of the issue of shares or debentures of a
company is underwritten, it is to be said as “partial underwriting”. In such a case the
part of the issue of shares or debentures may be underwritten by firm or person who
has agreed to take the risk
• Syndicate Underwriting : is one in which, two or more agencies or underwriters
jointly underwrite an issue of securities. Such an arrangement is entered into when the
total issue is beyond the resources of one underwriter or when he does not want to
block up large amount of funds in one issue.
• Firm Underwriting:It refers to a definite commitment by the underwriter to take a
specified no. of shares, irrespective of the no. of the shares subscribed by the public

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 Marked and Unmarked Applications
 When the issue of the shares of a
company is underwritten by two or
more underwriters, it is usual that
the applications for shares sent
through the underwriters should
bear a stamp of the respective
underwriter, other wise it
would be very difficult for the
company to determine that how
many applications have been
received from a particular
underwriter.
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Marked Applications:-
The application forms bearing the
stamp of the underwriter, are termed as
“Marked Applications”
The benefit of marked applications is
given to the concerned underwriters in
whose name application forms have
been marked.
Unmarked Applications:-
The application forms which do not
bear the stamp of the underwriter, are
termed as “Unmarked Applications”
The benefit of unmarked applications is
given first to the company to the extent
of issue not underwritten by
underwriters.
Determining Liability of underwriter

Gross liability ***

Less : Firm underwriting

***
Less : Marked applications ***

Less: Unmarked applications

***

+/- : Surplus of any underwriter

• credited to others in G.L. ratio***

Liability of the underwriter ***

Add: Firm underwriting ***

***
Total liability of the underwriter
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ROLE OF UNDERWRITER

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 The primary role of the underwriter is to purchase securities from the
issuer and resell them to investors.

Underwriters act as intermediaries between issuers and investors,

providing for an efficient of capital .

The underwriters take the risk that it will be able to resell the securities at
a profit.

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 The underwriter is the organization that is actually responsible for
pricing, selling, and organizing the issue, and it may or may not provide
additional services.

Such an activity helps to enhance the goodwill of the issuing company

by purchasing securities either directly from the company or from the
market, they vouchsafe the financial soundness of the company.

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 By undertaking to take up the whole issue or the remaining shares not
subscribed by the public, it helps a company to undertake project
investments with the assurance of adequate capital funds.

Underwriters provide stability to the price of securities by purchasing and

selling various securities. This ultimately benefits the stock market.

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 SEBI GUIDELINES FOR UNDERTAKING PROCESS

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 Eligibility criteria, Procedure for registration and operational guidelines are covered
under SEBI (Underwriters) Rules, 1993 and SEBI (Underwriters) Regulations 1993.
The words "underwriting" and "Underwriter" are defined in the aforesaid Rules as
under:

"underwriting" means an agreement with

or without conditions to subscribe to the
"underwriter" means a person, who engages in the
securities of a body corporate when the
business of underwriting of an issue of securities of a
existing shareholders of such body
body corporate;
corporate or the public do not subscribe
to the securities offered to them.

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Rule 3(1) of the aforesaid Rules makes Registration with the SEBI compulsory.

To quote the said Rule:-

“No person shall act as underwriter unless he holds a certificate granted by the
Board under the regulations".

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 Conditions for Registration :
In case of any change in the status and constitution, the underwriter shall
obtain prior permission of the Board to continue to act as underwriter;

without prejudice to the obligations under any other, the underwriter shall enter
into a valid agreement with the body corporate on whose behalf he is acting as
underwriter and the said agreement amongst other things may define the allocation of
duties and responsibilities between him and such body corporate and;

he shall pay the amount of fees of registration in the manner provided in the
regulations;

he shall abide by the rules and regulations made under the Act in respect of the
activities carried on by him as an underwriter.

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 Eligibility criteria Regulation (6)

or any person,
has the has any past
directly or
necessary experience in
indirectly
infrastructure underwriting or fulfils the
connected
like adequate has in his capital
with the is a fit and
office space, employment adequacy
applicant has proper
equipments, and minimum two requirements
not been person.
manpower to persons who specified in
granted
effectively had the regulation 7 ;
registration
discharge his experience in
by the Board
activities; underwriting;
under the Act;

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 Capital Adequacy Ratio Regulation (7)

The capital adequacy requirement referred to in sub-

regulation (d) of regulation 6 shall not be less than the
net worth of Rupees Twenty Lakhs

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 EXAMPLE :

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 Alibaba Group Holding Limited is a Chinese e- commerce company that
provides consumer-to- consumer, business-to-consumer and business-to-
business sales services via web portals.

The company came up with an IPO on 5th September 2014

The IPO ultimately ended up raising more than

$20 billion.

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 The six banks listed on Alibaba’s prospectus officially are regarded as
having equal status as lead underwriters. They were:

Underwriters For Alibaba:

• Credit Suisse
• Morgan Stanley
• J P Morgan
• Goldman Sachs
• Deutsche Bank
• Citigroup

Pranav Sharma
 Thank YOU

Pranav Sharma