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Underwriting of securities ( Share AND Debenture )

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  1. 1. UNDERWRITING Pranav Sharma
  2. 2. “Underwriting is an agreement entered into before t h e shares are b o u g h t b y t h e public that in t h e e v e n t of t h e public n o t taking u p t h e whole o f t h e m t h e underwriter will t ak e an allotment of s u c h part of t h e shares as the public has not applied for.” Meaning of Underwriting Pranav Sharma
  3. 3. 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. Need For Underwriting Pranav Sharma
  4. 4. The persons or institutions underwriting a public issue of shares or debentures are called “Underwriter” A person who buys and sells things for other people is called 'Broker'. Underwriters give the guarantee to procure subscriptions to the shares or debentures issued, they take responsibility of subscribing. Brokers merely promise or try to procure subscriptions to the shares or debentures issued; they do not take any responsibility of subscribing. If whole of the issue is not subscribed by the public, underwriter is liable to take the balance of the shares or debentures. Broker is not liable to take any shares or debentures. Remuneration paid to the underwriter is known as “Underwriting Commission” Remuneration paid to the broker is known as “Brokerage”. Underwriter V/S Broker Pranav Sharma
  5. 5. Underwriting Commission In case of shares 5% of the issue price of the shares In case of debentures 2 % of the issue price of the debentures 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 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 associates.  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. Pranav Sharma
  6. 6. TYPES OF UNDERWRITING Underwriting Complete Underwriting Partial Underwriting Firm Underwriting Syndicate Underwriting Pranav Sharma
  7. 7. • 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 Pranav Sharma
  8. 8.  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. 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. Marked and Unmarked Applications Pranav Sharma
  9. 9. 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 *** Pranav Sharma
  10. 10. ROLE OF UNDERWRITER Pranav Sharma
  11. 11. 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. Pranav Sharma
  12. 12. 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. Pranav Sharma
  13. 13. 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. Pranav Sharma
  15. 15. 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 securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them. "underwriter" means a person, who engages in the business of underwriting of an issue of securities of a body corporate; Pranav Sharma
  16. 16. 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". Pranav Sharma
  17. 17. 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. Conditions for Registration : In case of any change in the status and constitution, the underwriter shall Pranav Sharma
  18. 18. has the necessary infrastructure like adequate office space, equipments, and manpower to effectively discharge his activities; has any past experience in underwriting or has in his employment minimum two persons who had the experience in underwriting; or any person, directly or indirectly connected with the applicant has not been granted registration by the Board under the Act; fulfils the capital adequacy requirements specified in regulation 7 ; is a fit and proper person. Eligibility criteria Regulation (6) Pranav Sharma
  19. 19. 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 Capital Adequacy Ratio Regulation (7) Pranav Sharma
  20. 20. EXAMPLE : Pranav Sharma
  21. 21. 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. Pranav Sharma
  22. 22. The six banks listed on Alibaba’s prospectus officially are regarded as having equal status as lead underwriters. They were: • Credit Suisse • Morgan Stanley • J P Morgan • Goldman Sachs • Deutsche Bank • Citigroup Underwriters For Alibaba: Pranav Sharma
  23. 23. Thank YOU Pranav Sharma