Section: B

BBA4

Prepared for:
Md. Mominul Hoq
Lecturer(Finance)
FBS,BUP

What is underwriting/ underwriter?

Discuss their role in an economy.
Underwriting refers to the process by which investment banks raise investment capital from
investors on behalf of corporations and governments that are issuing securities.
This means they have taken on the risk of distributing the securities. Should they not be able to find
enough investors, they will have to hold some securities themselves. Underwriters make their
income from the price difference between the price they pay the issuer and what they collect from
investors.
An underwriter is a professional that has the ability to understand the risks to which the
underwritten object is exposed to. This ability is gained not only through theoretical study but is also
the result of years of experience dealing with similar risks.
For a developing country like Bangladesh, underwriters play a key role. Experienced underwriters
develop a sense that allows them to determine when the risk should be accepted and when
declined. They may develop a portfolio of the risks assessed and give advice to the company on
which risks are worth a return. For growing businesses in Bangladesh it is necessary to foresee the
viability of business securiies to avoid business failure and to encourage investment.
Our economy needs underwriters for the following advantages:

underwriting agreement assures of the required funds within a reasonable or agreed time. In
the absence an underwriting agreement, a company may face a situation where there might
not be even the minimum return. the company may have to postpone its projects for which
the issue was meant. As a result of an underwriting contract, the company can go ahead with
its plan confidently.
Benefit of Expert Advice.

The issuing company gets the benefit of expert advice. An underwriter of repute would go
into the soundness of the plan put forward by the company before entering into an
agreement and suggest changes wherever necessary, enabling the company to avoid certain
pitfalls, for example stock market crash.
Increase in Goodwill of the Company.

The investors runs much less risk when they buy shares or debentures which have been
underwritten by reputed personnels. They assure of the soundness of the company. Thus,
good underwriters increase the goodwill of the company.
Service to Prospective Buyers.

Underwriters provides useful services to the perspective buyers of securities by giving them
expert advice regarding the safe investment in sound companies. Sometimes they publish
information and their expert opinion in respect of various companies.