M Banker
M Banker
M Banker
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.
Sub-Underwriting:- is one in which an underwriter gets a part of the issue further underwritten by another agency. This is done to
diffuse the risk involved in underwriting.
Firm Underwriting: - is one in which the underwriters apply for a block of securities.
Under it, the underwriters agree to take up and pay for this block of securities as ordinary subscribers in addition to their commitment as
underwriters.
Role of Underwriters
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.
Perhaps the most visible and familiar element of the initial public offering process is the underwriter. 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. With direct public offerings, there is no need for an underwriter.
Selection of a good underwriter is of the utmost importance, but it's important to understand that many underwriters are equally selective
of their clients. Because an underwriter's reputation depends on successful issues, few firms will be willing to stake their reputation on
questionable companies.
When selecting an underwriter, it's important to seek out an established company with a good reputation and quality
research coverage in your field. The decision may also depend on the kind of agreement the underwriter is willing to
make regarding the sale of shares. For profitable and established private companies, it shouldn't be difficult to locate an
underwriter willing to make a firm commitment arrangement. Under such an agreement, the underwriter agrees to buy all
issues shares, regardless of ability to sell them at a particular price.
For riskier or less established companies, an underwriter may offer best efforts arrangement for the initial public
offering. A best efforts contract requires the underwriter to buy only enough shares to fill investor demand. Under this
arrangement, the underwriter accepts no responsibility for unsold shares.
Underwriting is an optional for a fixed price offer. Therefore, if an issuer accompany feels that the issue is strong enough to sell on its
merits, it may decide to take the risk and opt for not underwriting it. In such case, the company only pays brokerage for marketing its
securities to investors and saves on underwriting commission. The underwriting decision is normally taken on consultation with the
lead manager who has a good understanding of the market.
The regulations further stipulate that if a fixed price offer is undertaken, the lead manager(s) managing the issue shall undertake a
minimum obligation of 5% of the total underwritten amount or Rs. 25 lakh whichever is lower. This regulation suppose that in
stipulating a mandatory participation of lead manager in the underwriting risk of the issue, a sense of responsibility would be
included to bring quality issues to the market.
Underwriting is compulsory in book built offers to the extent of the NPO and the issuer company does not have any discretion
therein. Therefore, if a company opts for 100% book building route, underwriting has to be done by the book runners and the
syndicate members. However, this requirement does not apply to issues where in 50% of the NPO has to be mandatorily allotted to
QIBs. In such issues, only the balance portion of NPO, shall be subject to mandatory underwriting.
In book built offers, the book runner assumes the responsibility for the overall underwriting. In case there is more than one book
runner, the interse allocation among the book runners determines the extent of their obligation. The book runner(s) enter in to
underwriting agreement with the issuer company. In case of under subscription in the issue, it develops on the book runners.
.
• Reference
• Financial Services by M Y Khan, McGraw
Hill Education (India) Pvt Ltd, 2013
• Merchant Banking by H.R. Machi Raju, New
Age International (P) Ltd., Publishers, 2010