UNDERWRITING OF SECURITIES

If the company does not receive 90 per cent of issued amount from public

subscription within 120 days from the date of opening of the issue, the company

cannot proceed with allotment and must refund the amount of subscription. In

the case of a new company, it cannot obtain a certificate to commence business.

Under the SEBI guidelines underwriting is mandatory for the net issue made to

the public. In view of all this public companies enter into underwriting

arrangements.

The persons or institutions who or which underwrite the issue are known as

underwriters. In India the business of underwriting is carried on by the Industrial

Development Bank of India, Industrial Finance Corporation of India, the Industrial

Credit and Investment Corporation of India, Life Insurance Corporation of India,

commercial banks, Merchant Bankers investment trusts and other financial

houses. In the case of large issues, arrangements are made with several

underwriters, each underwriting a specified amount. The directors must be

careful in choosing the underwriters, as they will have to state in the prospectus

that in their opinion the resources of the underwriters are sufficient to discharge

their obligations.

Underwriting commission.

(a) in the case of shares, five per cent of the price at which the shares are

issued or the amount of rate authorised by the Articles, whichever is less,

and

(b) in the case of debentures, two and a half per cent of the price at which the

debentures are issued or the amount or rate authorised by the Articles,

whichever is less.

(c) the commission paid or agreed to be paid is disclosed in the prospectus or

statement in lieu of prospectus, as the case may be.

(d) commission is not payable on shares and debentures which are not offered

to public for subscription.

Underwriting agreement. Underwriting agreement may take any of the two

forms:

(a) Pure underwriting. Under this type of contract underwriters undertake to

subscribe for shares to a certain limit only when the offer made to the public is

not fully subscribed for by them. Thus if underwriters underwrite 10,000 shares

issued by a company, they will have to purchase 2,000 shares if the public applies

for 8,000 and 3,000 shares if the public applies for 7,000 and nothing if the public

applies for 10,000 or more shares. The underwriting contract may be signed by

one underwriter if the financial position of the underwriter is as good as to take

the risk of subscribing the whole issue in the worst circumstances of no response

by the public. But generally, the underwriting contract is signed between the

company and two or more underwriters each agreeing to insure against the risk

only to a limited extent.

(b) Firm underwriting. Under 'firm' underwriting contract, the underwriters,

instead of standing behind the offer, agree to make an outright purchase of

shares. Thus under 'firm' underwriting, the underwriters stipulate that they be

allotted a given number of shares whether or not the issue is oversubscribed. The

underwriters under such agreement get priority over the general public in relation

to allotment of shares in the event of over-subscription. If, for example,

underwriters have Firm' underwritten 10,000 shares of the total issue of 40,000

shares, only 30,000 shares shall be available to the public even if there are

applications for 50,000 shares.