Underwriter 3dy3k
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Underwriter A company or other entity that isters the public issuance and distribution of securities from a corporation or other issuing body. An underwriter works closely with the issuing body to determine the offering price of the securities, buys them from the issuer and sells them to investors via the underwriter's distribution network.
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1
Nature
Underwriting is an agreement, entered into by a company with a financial agency, in order to ensure:that the public will subscribe for the entire issue of shares or debentures made by the company. The financial agency is known as the underwriter and it agrees to buy that part of the company issues which are not subscribed to by the public in consideration of a specified underwriting commission.
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Content of agreement
The underwriting agreement, among others, must provide for the period during which the agreement is in force, the amount of underwriting obligations, the period within which the underwriter has to subscribe to the issue after being intimated by the issuer, the amount of commission and details of arrangements, if any, made by the underwriter for fulfilling the underwriting obligations. The underwriting commission may not exceed 5 percent on shares and 2.5 percent in case of debentures. Underwriters get their commission irrespective of whether they have to buy a single security or not.
03/12/10
3
Benefits
It relieves the company of the risk and uncertainty of marketing the securities. Underwriters have an intimate and specialized knowledge of the capital market. They offer valuable advice to the issuing company in the preparation of the prospectus, time of floatation and the price of securities, etc. They also provide publicity service to the companies which have entered into underwriting agreements with them. It helps in financing of new enterprises and in the expansion of the existing projects.
03/12/10
4
It builds up investors' confidence in the issue of securities. The association of well-known underwriters lends prestige to the company and the investors feel that the issue is sound enough for profitable investment. Also, the securities underwritten by reputed underwriters receives better response from the public. The issuing company is assured of the availability of funds. Important projects are not delayed for want of funds.
.
03/12/10
5
It facilitates the geographical dispersal of securities because generally, the underwriters maintain s with investors throughout the country
03/12/10
6
Types of underwriting
Syndicate Underwriting:- is one in which, two or more agencies or underwriters tly 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. The name of every underwriter is mentioned in the prospectus along with the amount of securities underwritten by him.
03/12/10
7
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. The underwriter need not take up the whole of the securities underwritten by him. For example, if the underwriter has underwritten the entire issue of 5 lakh shares offered by a company and has in addition applied for 1 lakh shares for firm allotment. If the public subscribes to the entire issue, the underwriter would be allotted 1 lakh shares even though he is not required to take up any of the shares.
03/12/10
8
Types of underwriters
Underwriting of capital issues has become very popular due to the development of the capital market and special financial institutions. The lead taken by public financial institutions has encouraged banks, insurance companies and stock brokers to underwrite on a regular basis. The various types of underwriters differ in their approach and attitude towards underwriting:Development banks like IFCI, ICICI and IDBI:- they follow an entirely objective approach. They stress upon the long-term viability of the enterprise rather than immediate profitability of the capital issue. They attempt to encourage public response to new issues of securities.
03/12/10
9
Institutional investors like LIC and AXIS:their underwriting policy is governed by their investment policy. Financial and development corporations:they also follow an objective policy while underwriting capital issues.
03/12/10
10
Investment and insurance companies and stock-brokers:- they put primary emphasis on the short term prospects of the issuing company as they cannot afford to block large amount of money for long periods of time.
03/12/10
11
Legal Requirement
To act as an underwriter, a certificate of registration must be obtained from Securities and Exchange Board of India (SEBI) The certificate is granted by SEBI under the Securities and Exchanges Board of India (Underwr .
03/12/10
12
These regulations deal primarily with issues such as registration, capital adequacy, obligation and responsibilities of the underwriters. Under it, an underwriter is required to enter into a valid agreement with the issuer entity and the said agreement among other things should define the allocation of duties and responsibilities between him and the issuer entity. These regulations have been further amended by the Securities and Exchange Board of India (Underwriters) (A .
03/12/10
13
Capital /other requirement
Shall not be less than the net worth of 20 lakhs Form A and certificate (Form B) is required. A stock broker or merchant banker acting as an underwriter shall be governed by these regulation in other respects.
03/12/10
14
Registration fee
Every underwriter shall pay a sum of Rs.5 lakhs as registration fees at the time of grant of certificate by the Board. Every underwriter to keep registration in force shall pay renewal fee of Rs.2 lakhs every three years from the fourth year from the date of initial registration.
03/12/10
15
Not applicable
Stock brokers and merchant banker
03/12/10
16
General responsibilities
The total underwriting obligations under all the agreement shall not exceed 20 times of the net worth. Every underwriter, shall subscribe securities within 45 days of the receipt of intimation from such body corporate ( in event of being called upon to subscribe for securities of a body corporate pursuant to an agreement)
03/12/10
17
Period of maintenance of records
5 years minimum Every underwriter shall appoint a compliance officer.
03/12/10
18
Value of Taxable Service
Value of taxable service in relation to the service provided by an underwriter to a client, shall be the gross amount charged by such underwriter from the client for services rendered in relation to underwriting in any manner”. (Section 67 of Finance Act, 1994 as amended) As per Regulation 14 of the SEBI (Underwriters) Regulation, 1993 the agreement between the Underwriter and the body corporate shall also provide for the amount of commission or brokerage payable to the underwriter. Service Tax is required to be paid by the underwriter at the rate of 5% on such commission or brokerage paid to him for the services of underwriting rendered by him.
03/12/10
19
The underwriting commission varies depending upon the category of underwriter whether a financial institution or otherwise and also on the amount/s devolving on the public and those devolving on the underwriters. However the maximum underwriting commission applicable is notified by the Banking Department of the Ministry of Finance, though, lower rates of underwriting commission can also be negotiated between the underwriter and the client.
03/12/10
20
Green shoe option
A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an overallotment option.
03/12/10
21
A green shoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges. Green shoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions warrant such action. However, some issuers prefer not to include greenshoe options in their underwriting agreements under certain circumstances, such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought. The term is derived from the fact that the Green Shoe Company was the first to issue this type of option.
03/12/10
22
03/12/10
23
03/12/10
1
Nature
Underwriting is an agreement, entered into by a company with a financial agency, in order to ensure:that the public will subscribe for the entire issue of shares or debentures made by the company. The financial agency is known as the underwriter and it agrees to buy that part of the company issues which are not subscribed to by the public in consideration of a specified underwriting commission.
03/12/10
2
Content of agreement
The underwriting agreement, among others, must provide for the period during which the agreement is in force, the amount of underwriting obligations, the period within which the underwriter has to subscribe to the issue after being intimated by the issuer, the amount of commission and details of arrangements, if any, made by the underwriter for fulfilling the underwriting obligations. The underwriting commission may not exceed 5 percent on shares and 2.5 percent in case of debentures. Underwriters get their commission irrespective of whether they have to buy a single security or not.
03/12/10
3
Benefits
It relieves the company of the risk and uncertainty of marketing the securities. Underwriters have an intimate and specialized knowledge of the capital market. They offer valuable advice to the issuing company in the preparation of the prospectus, time of floatation and the price of securities, etc. They also provide publicity service to the companies which have entered into underwriting agreements with them. It helps in financing of new enterprises and in the expansion of the existing projects.
03/12/10
4
It builds up investors' confidence in the issue of securities. The association of well-known underwriters lends prestige to the company and the investors feel that the issue is sound enough for profitable investment. Also, the securities underwritten by reputed underwriters receives better response from the public. The issuing company is assured of the availability of funds. Important projects are not delayed for want of funds.
.
03/12/10
5
It facilitates the geographical dispersal of securities because generally, the underwriters maintain s with investors throughout the country
03/12/10
6
Types of underwriting
Syndicate Underwriting:- is one in which, two or more agencies or underwriters tly 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. The name of every underwriter is mentioned in the prospectus along with the amount of securities underwritten by him.
03/12/10
7
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. The underwriter need not take up the whole of the securities underwritten by him. For example, if the underwriter has underwritten the entire issue of 5 lakh shares offered by a company and has in addition applied for 1 lakh shares for firm allotment. If the public subscribes to the entire issue, the underwriter would be allotted 1 lakh shares even though he is not required to take up any of the shares.
03/12/10
8
Types of underwriters
Underwriting of capital issues has become very popular due to the development of the capital market and special financial institutions. The lead taken by public financial institutions has encouraged banks, insurance companies and stock brokers to underwrite on a regular basis. The various types of underwriters differ in their approach and attitude towards underwriting:Development banks like IFCI, ICICI and IDBI:- they follow an entirely objective approach. They stress upon the long-term viability of the enterprise rather than immediate profitability of the capital issue. They attempt to encourage public response to new issues of securities.
03/12/10
9
Institutional investors like LIC and AXIS:their underwriting policy is governed by their investment policy. Financial and development corporations:they also follow an objective policy while underwriting capital issues.
03/12/10
10
Investment and insurance companies and stock-brokers:- they put primary emphasis on the short term prospects of the issuing company as they cannot afford to block large amount of money for long periods of time.
03/12/10
11
Legal Requirement
To act as an underwriter, a certificate of registration must be obtained from Securities and Exchange Board of India (SEBI) The certificate is granted by SEBI under the Securities and Exchanges Board of India (Underwr .
03/12/10
12
These regulations deal primarily with issues such as registration, capital adequacy, obligation and responsibilities of the underwriters. Under it, an underwriter is required to enter into a valid agreement with the issuer entity and the said agreement among other things should define the allocation of duties and responsibilities between him and the issuer entity. These regulations have been further amended by the Securities and Exchange Board of India (Underwriters) (A .
03/12/10
13
Capital /other requirement
Shall not be less than the net worth of 20 lakhs Form A and certificate (Form B) is required. A stock broker or merchant banker acting as an underwriter shall be governed by these regulation in other respects.
03/12/10
14
Registration fee
Every underwriter shall pay a sum of Rs.5 lakhs as registration fees at the time of grant of certificate by the Board. Every underwriter to keep registration in force shall pay renewal fee of Rs.2 lakhs every three years from the fourth year from the date of initial registration.
03/12/10
15
Not applicable
Stock brokers and merchant banker
03/12/10
16
General responsibilities
The total underwriting obligations under all the agreement shall not exceed 20 times of the net worth. Every underwriter, shall subscribe securities within 45 days of the receipt of intimation from such body corporate ( in event of being called upon to subscribe for securities of a body corporate pursuant to an agreement)
03/12/10
17
Period of maintenance of records
5 years minimum Every underwriter shall appoint a compliance officer.
03/12/10
18
Value of Taxable Service
Value of taxable service in relation to the service provided by an underwriter to a client, shall be the gross amount charged by such underwriter from the client for services rendered in relation to underwriting in any manner”. (Section 67 of Finance Act, 1994 as amended) As per Regulation 14 of the SEBI (Underwriters) Regulation, 1993 the agreement between the Underwriter and the body corporate shall also provide for the amount of commission or brokerage payable to the underwriter. Service Tax is required to be paid by the underwriter at the rate of 5% on such commission or brokerage paid to him for the services of underwriting rendered by him.
03/12/10
19
The underwriting commission varies depending upon the category of underwriter whether a financial institution or otherwise and also on the amount/s devolving on the public and those devolving on the underwriters. However the maximum underwriting commission applicable is notified by the Banking Department of the Ministry of Finance, though, lower rates of underwriting commission can also be negotiated between the underwriter and the client.
03/12/10
20
Green shoe option
A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an overallotment option.
03/12/10
21
A green shoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges. Green shoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions warrant such action. However, some issuers prefer not to include greenshoe options in their underwriting agreements under certain circumstances, such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought. The term is derived from the fact that the Green Shoe Company was the first to issue this type of option.
03/12/10
22
03/12/10
23
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