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I do hereby declare that the doctrinal research entitled “UNDERWRITING OF SECURITIES” submitted to Tamil Nadu National Law School in partial fulfillment of the requirement of the award of the degree of Undergraduate Department is a record of original work done by me under the supervision and guidance of Prof.Mrs.T.S.AGILA (mentor) Law Department of Tamil Nadu National Law School and that has not formed the basis of any degree or diploma or fellowship or any other title to any candidate of any university.
ACKNOWLEDGEMENT
Every work accomplished is a pleasure – a sense of satisfaction. However a number of people always motivate, criticize and appreciate a work with their objective ideas and opinions, hence I would like to use this opportunity to thank all, who have directly or indirectly helped me to accomplish this project.
Place: Trichy Prof.T.S.AGILA Date: 01.11.2016 (mentor)
TABLE OF CONTENTS
INTRODUCTION 1
Underwriting is a guarantee given by the underwriters to take up whole or part of the issue of securities not subscribed by the public. It is a marketing technique whereby corporate enterprises are able to sell their securities to the public and thereby achieve success in the public issue. The service is utilized by corporates in order to procure the necessary funds. The agreement between the issuing company and the financial intermediary called the UNDERWRITER , whereby sale of a certain quantum of securities is guaranteed for the issuing company, is known as UNDERWRITING AGREEMENT. The underwriter works for a commission called UNDERWRITING COMMISSION.
DEFINTION According to GERSTENBERG , “Underwriting is an agreement entered into before the shares are brought before the public that in the event of the public not taking up the whole of
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When a large issue of securities is made and the underwriting of securities is contracted out by the main underwriter to other underwriting intermediaries for a commission, it is known as SUB- UNDERWRITING. This type of underwriting helps the main underwriter minimize the risk the loss of investment in the event of the issue being unpopular.
When an issue of securities by a company is underwritten by two or more underwriting intermediaries jointly, it is called JOINT UNDERWRITING. The objective is to minimize the risk and share the benefit arising from the capital issue. Besides, this also helps underwriters with limited resources to pool them and successfully take up the issue.
When a syndicate of underwriters, by means of an agreement, underwrites the issue of securities collectively, it is known as SYNDICATE UNDERWRITING. Such an arrangement is worked out in the case of issues that are considered potentially risky. There will be two types of arrangements which will form part of the syndicate underwriting. They are agreement between the issuing company and underwriter, and arrangement among the underwriters themselves stating the terms and conditions.
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BENEFITS AND FUNCTIONS 4
The financial service of underwriting is found advantageous for the issuers and the public alike. The function and the role of the underwriting firms is given below:
Underwriting, being a kind of a guarantee for subscription of a public issue of securities, enables a company to raise the necessary capital funds. 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. Underwriting agreement assures the company of the required funds within a reasonable or agreed time.
Underwriters of repute often help the company by providing advice on matters pertaining to the soundness of the proposed plan etc., thus enabling the company to avoid certain pitfalls. It is there possible for an issuing company to obtain the benefit of the expert advice through
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Underwriters are very useful to the buyers of securities due to their ability to give expert advice regarding the safety of the investment and the soundness of companies. The information and the expert opinion published by them in various newspapers and jurnals are so helpful.
Underwriters provide stability to the price of securities by purchasing and selling various securities. This ultimately benefits the stock market.
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INDIAN SCENARIO 6
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COMMERCIAL BANKS
After the nationalisation of commercial banks, and with the initiation of reform measures in the beginning of the nineties, banks started taking a active part in the underwriting business.
DFI’s
A number of development finance institutions were established all over the country in order to spur development and growth in the industrial, export and agricultural sectors. These institutions provide direct and indirect, financial and other type of assistance. These institutions include LIC, IFCI, ICICI, IDBI, UTI, and SFC’s. These institutions account for a major share of the underwriting business in India.
OBSTACLES 8
Underwriters in India face several debilitating conditions that constitute the obstacle to their progress. Some of the obstacles faced by them are:
CHAOTIC CAPITAL MARKET
An essential element for the development and the promotion of underwriting is the existence of a well-developed capital market. But the capital market in India is of recent origin. The kind of equity culture existing in the capital market is sluggish, dormant, and chaotic. These resulted in the slow progress of underwriting.
SLOW INDUSTRIALIZATION
Industrial development has been slow and tardy. There were many legislative and other measures of control and regulation that were so archaic that they caused heavy hardship to industrial development.
MANAGING AGENCY SYSYTEM
This was responsible for the slow growth of underwriting business in India. Managing agents who performed the underwriting activity indulged in the sale of securities managed companies to their friends.
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UNDERWRITER 9
The financial services intermediary who arranges for subscription of the issue of securities, in the event of the issue not being taken up by the public, or who firmly guarantees a capital issue is called the “underwriter”.
Before accepting the underwriting obligation, the underwriter takes into consideration factors such as the company’s standing and record, competence of the management, objectives of the issue, and off- balance sheet liabilities.
UNDERWRITING AGREEMENT
A contract between an underwriter and the company issuing capital with regard to the commitment for subscription of securities is known as “underwriting agreement”. The underwriter agrees to subscribe or procure subscription to a portion of the capital to be issued, in case the issue is not fully subscribed, the maximum liability of the underwriter being restricted to the amount underwritten. The underwriters usually include merchant bankers or financial institutions such as UTI and other mutual funds , LIC or ICICI.
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SEBI GUIDELINES 10
SEBI has issued detailed guidelines regulating underwriting as a financial service. The following are the important guidelines:
OPTIONAL
Underwriting has been made optional by the SEBI, for the issue since October 1994. Accordingly, if an issuer has not been underwritten and the firm is not able to collect 90 percent of the amount offered to the public, the entire amount collected would be refunded to the investors. The requirement of minimum 90 percent subscription will not be applicable to the exclusive debt issues, provided the issuer makes adequate disclosures about the alternate source of finance.
NUMBER OF UNDERWRITERS
The issuers will decide the number of underwriters. For this, the lead managers must satisfy themselves about the net worth of the underwriters, and the outstanding commitments and disclose the same to SEBI. The underwriting arrangement must be filed with stock exchange.
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VARIANTS OF UNDERWRITING 11
There are variants of the underwriting business, which have evolved owing to the series of changes that have taken place in the control and regulatory ambience of the capital market in India.
OFFER FOR SALE
Offer for sale takes place when a company arranges to obtain money from private sources, by making the issue of securities fully to them. The private sources include issue houses and merchant bankers. Issue is generally made below the par value, which is then sold to the public. In such an eventuality the company issues “statement in lieu of prospectus” instead of regular prospectus. A statement in lieu of prospectus should be filed with ROC three days before the allotment of shares and debentures.
BOUGHT-OUT DEALS (BODs)
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An arrangement, whereby the entire equity or related security is bought in full or in lots, with the intention of off-loading it later in the market is called “bought – out deal”.
FEATURES
ARRANGEMENT – The arrangement takes place between the merchant bankers/ sponsor of the company, the shares being held by the sponsor until they are ready for public participation. NO RETAILING – BODs eliminate retailing, thereby saving time and cost. They are the quickest and cheapest source of finance for small and medium companies. FUND- BASED ACTIVITY – BODs convert a fee- based activity into a fund- based activity for merchant bankers. WHOLESALE ACTIVITY – The capital raised from public, which is a retail activity, is rendered into a wholesale activity by the guidelines issued by SEBI for the reservation of issues without lock- in periods.
RESERVED PORTIONS – From the reserved category for the institutional investors, lead managers can take a stake upto 5 percent of the post- issue equity. The reserved portion of the equity need no to be underwritten. The public offer is 25 percent of the issue and underwriting is optional.
ADVANTAGES 12
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