CHAPTER- V

PERFORMANCE EVALUATION OF MERCHANT BANKERS-II

(UNDERWRITING OF PUBLIC ISSUES)

Underwriting of shares is linked with the management of public issues as it

involves marketing and distribution of securities offered to public. Merchant bankers
as lead managers to the public issues are not responsible only for selecting and
appointing other financial intermediaries related to the issue, but also for arranging
and coordinating the activities of underwriters, brokers, registrar and bankers to the
issue etc.
Underwriting, in the context of primary capital market, refers to contractually
guaranteeing subscription to shares and other securities. Herein, the underwriters
undertake a responsibility or give a guarantee that the securities offered to the public
or shareholders will be subscribed for. If the issuer is not sure of the subscription of
the issue, he first underwrites the shares with financial institution/lead managers. If
the shares are subscribed fully by the public, the underwriters get a commission as a
percentage of total amount of shares issued. In case the issue is undersubscribed, then
the underwriters have to buy the unsubscribed portion of the issue or to the extent of
his guarantee.
Underwriting of capital issues in India is regulated by Securities and Exchange
Board of India. According to SEBI (Underwriters) Rules, 1993, 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. And an underwriter has been defined as
a person, who engages in the business of underwriting of an issue of securities of a
body corporate.
In the western countries, especially UK and USA, underwriting means
purchase of securities from the company by the investment bankers, who
subsequently sell it to the public. In India, if the minimum subscription of 90% of the
issue is not subscribed by the public, then the company has to refund the amount to
the applicants. So the promoters, before issuing the prospectus for the issue of shares,
have to ensure against the contingent risk of failure of the issue.
The underwriters repose a confidence in the minds of investors and help in the
mobilization of funds of the individual investors. The retail investors always need

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protection of his investment in a project and so the services of underwriting
institutions are required. Dolvin in his research paper has stated that underwriters do
create value for issuer in the sense that offer price goes higher for the issues managed
by reputed underwriters. It implies that higher quality underwriters apply more
subjective criteria for selecting offer prices and/or that the criteria employed are of
higher quality1.
In the selection of underwriters, financial strength is a major consideration.
Other aspects taken into consideration are experience in the primary market, past
underwriting performance and defaults, outstanding underwriting commitments, the
network of investors, clients of the underwriter and overall reputation. The
underwriter on his part has to assess the companys standing and record, competence
of the management, objects of the issue, project details, offer price and other terms of
the issue and off balance sheet liabilities before accepting the underwriting
obligations2.
5.1 Underwriting of Capital Issues in India
Underwriting of capital issues in India is of recent origin as compared to the
developed capital markets of UK and USA. During the British rule, London based
Managing Agency Houses in India performed the principal activities of floatation of
corporate securities and hence the presence of pure merchant banks was negligible.
Indian business houses also copied the system from British firms and established
Managing Agency Houses as family business in the pre World War-II era. Many of
these later on converted into partnership firms and public limited companies. The
prominent Indian managing agency housed included: Tatas, Birlas, Dalmias,
Singhanias, Thapars, Bhadanis, Narangs, Ruias, Poddars and J.K.3.
Underwriting of capital issues did not develop in India during this period
because of the monopoly of managing agency houses distributing shares to their
friends and relatives. The underdeveloped capital market was characterized by low
income, low savings, poverty circle and the absence of banking habits among public
at large4.
Underwriting of securities in India had its beginning in 1912, when M/s
Batliwala and Karani, a firm of share brokers in Bombay had underwritten the capital
issue of 50 lakh shares of Central India Spinning & Weaving Co. Ltd. In the year

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1913, Chunilal Saralya underwrote the public issue of preference shares of Tata Mills
Ltd.
The amendments in the Indian Companies Act, 1936 made it obligatory to
include in the prospectus, the names of the underwriters, the underwriting commission
payable and a statement by the directors to the effect that the underwriters have
requisite financial resources. The contract between the issuing company and the
underwriters was made accessible to the shareholders5.
Immediately after independence, the Capital Issues (Control) Act, 1947 was
passed by Parliament to regulate and control the capital issues by companies. It was
administered through the office of the Controller of Capital Issues under the Ministry
of Finance (Department of Economic Affairs). Indian Companies Act, 1956 further
streamlined the procedure for capital issues including underwriting of capital issues
and it facilitated the growth of capital market in the country after independence.
Data collected from the Reports of the RBI on Currency and Finance has
revealed that the proportion of private capital issues underwritten was 91.65% in
1971, 97.09% in 1976, 56.84% in 1981, 63.78% in 1986, 60.65% in 1987 and 61.59%
in 1988. Underwriters subscription as a percentage to total subscription stood at
41.95% in 1971, 49.35% in 1976, 11.27% in 1981, 0.95% in 1986, 3.26% in 1987 and
17.36% in 1988.
Since 1992, the regulations and control of various players in the primary
market have been under the supervision and control of SEBI. From time to time, it has
laid down guidelines for these players including underwriters of capital issues in
India.
5.1.1 SEBI Guidelines on Underwriting
Securities and Exchange Board of India (Underwriters) Rules, 1993 as
amended from time to time provide for the compulsory registration of underwriters,
provisions for the capital adequacy requirements, general obligations and
responsibilities with a specified code of conduct, inspection and disciplinary
proceedings by the SEBI and the procedure for action against underwriters in case of
default.
Similarly SEBI (Disclosure & Investor Protection) Guidelines, 2000 as amended
from time to time have prescribed a number of guidelines for the underwriters to the

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capital issues and the lead managers responsible for the success of the issue. Some of
these guidelines have been mentioned below.
(a) As per original guidelines issued by SEBI on June 11, 1992, underwriting was
mandatory for full issues and minimum requirements of 90% subscription was
also mandatory for each issue of capital to public. However, from October
1994, underwriting is not mandatory and now the issuer has the option to
decide whether the issue is to be underwritten or not. Number of underwriters
would also be decided by the issuers.
(b) The lead manager(s) must satisfy themselves about the net worth of the
underwriters and the outstanding commitment and disclose the same to SEBI.
A statement to this effect has to be incorporated in the prospectus.
(c) If the issue is underwritten and the company does not receive 90% of the
issued amount from public subscription plus accepted devolvement from
underwriters within 60 days of the opening of the issue, the company will
refund the amount of subscription. In case of disputed devolvement, the
company should refund the subscription, if the above conditions are not met.
(d) If the issue is not underwritten and the minimum subscription of 90% of the
offer to the public is not received, the entire amount received as subscription
would have to be returned.
The requirement of minimum 90% subscription will not apply for
exclusive debt issues provided the issuer makes adequate disclosures about the
alternative source of finance that have been tied up.
(e) The underwriting agreement may be filed with SEBI and should be open to
public during the period issue remains open.
(f) In respect to every underwritten issue, the lead merchant banker(s) shall
undertake a minimum underwriting obligation of 5% of the total underwriting
commitment or Rs 25 lacs, whichever is less, or else arrange for underwriting
of an equal amount by merchant banker associated with the issue and intimate
the same to SEBI.
(g) The outstanding underwriting commitments of a merchant banker shall not
exceed 20 times its networth at any point of time.
(h) In the case of under subscription of an issue, the lead merchant bank
responsible for underwriting arrangement shall invoke underwriting
obligations and ensure that the underwriters pay the amount of devolvement.

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 The same shall be incorporated in the inter-se allocation of responsibilities of
lead managers and shall accompany the due diligence certificate submitted by
the lead merchant banker to SEBI.
(i) In case there is a devolvement on underwriters, the lead manager shall ensure
that the underwriter(s) honour their commitments within 60 days from the date
of closure of the issue.
(j) In case of under subscribed issues, the lead manager shall furnish information
to SEBI, in respect of underwriters, who have failed to meet their underwriting
devolvement.
(k) In case of Book Building Issues:
(i) The syndicate members shall enter into an underwriting agreement
with the Book Runner (s) indicating the number of securities which
they would subscribe at the pre determined price.
(ii) The Book Runner (s) shall in turn enter into an underwriting
agreement with the issuing company.
(iii) In the event of syndicate members not fulfilling their underwriting
obligations, the Book Runner Lead Managers shall be responsible for
bringing the amount devolved.
5.1.2 Underwriting Commission
The Consideration for the underwriters, who provide guarantee against under
subscription of securities, is by way of commission payable on issue price at a
predetermined rate, of course within Govt. guidelines. Sometimes underwriting
agreement may state to pay the commission only on the amount devolved on the
underwriters and not on the total size of the issue. This is called contingent
underwriting.
The rate of underwriting commission as permitted by the Govt. is stated in the
following table.

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 Table 5.1
Rates of Underwriting Commission
(For public issue of shares and debentures)
S. No. On amount on amount
devolving On subscribed by
underwriters public
1. Shares 2.5% 2.5%
2. Preference Shares and on non
Convertible debentures
(a) For amount upto 5 lakhs 2.5% 1.5%
(b) For amount in excess of 5 lakhs 2.0% 1.0%

These rates of commission are the maximum ceiling rates, within which any
company will be free to negotiate with the underwriters. Underwriting commission
will not be payable on amounts of shares subscribed by promoters group, employees,
directors, their relatives and friends and to business associates.
5.2 Pattern of Underwriting of Public Issues since 1992-93
Till October 1994, underwriting of public issues was mandatory. Underwriting
was only for issues to the public which excluded reserved/preferential allotment to
reserved categories. In other words, underwriting was mandatory only to the extent of
net offer to the public.
Underwriting was made mandatory for public issues at par and with premium
of less than 25% of par value. The underwriting business in this period was very
lucrative. Due to favourable market conditions and good public response,
devolvement on underwriters was very low till 1992-93. In 1992-93, a large number
of underwriters lost their money as the new issues were not found to be profitable in
the secondary market. The devolvement on underwriters became large resulting into
the non fulfillment of their commitments by the underwriters.
The following table exhibits the number and amount of public issues
underwritten during the period from 1992-93 to 1996-97.

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 Table 5.2
Public Issues Underwritten and Amount of Issues Involved
Year Total Public Issues Public Issues Underwritten
Floated
No. Amount No. % Amount %
Rs. (crore) Rs. (crore)
1992-93 528 6,060.83 518 98.1 5,776.89 95
1993-94 770 12,544.04 754 97.8 8,952.01 71
1994-95 1,343 13,311.6 1,094 81.5 1,0286.09 77
1995-96 1,428 10,981.72 440 30.8 3,257.03 30
1996-97 753 11,648.2 85 11.3 912.13 8
Total 4,822 54,546.39 2,891 59.9 29,184.15 53.5
Source:- Compiled from Prime Directories of relevant years.

As shown in the table, proportion of number and amount of public issues

underwritten has been higher from 1992-93 to 1994-95, because of the mandatory
requirement of underwriting. After October 1994, when underwriting was made
optional for the issuer, they did not prefer the services of the underwriters. So in
1995-96 only 440 issuers preferred to appoint underwriters out of 1428 public issuers
during the year. There was a significant decline in the underwriting business in 1996-
97 when only 85 public issues out of 753 issues were underwritten which involved a
meagre sum of 8% of the total issue amount.
There were about 2,128 underwriters in 1994-95, out of which 1,712 were
brokers and 333 were private merchant banks. In 1995-96, 411 merchant banks, 1207
brokers, 50 banks and their subsidiaries, 10 financial Institutions and 9 foreign banks
participated in the underwriting activities of 440 public issues for a sum of Rs. 3257
crore. Private merchant banks and brokers accounted for 67% of underwriting in
1995-96 while remaining portion was underwritten by banks and financial
Institutions. Till 1992-93, financial Institutions and banks dominated the underwriting
business after which this place was acquired by private merchant banks and brokers.
In 1996-97, private merchant banks got 55% and brokers 23% of underwriting
business, while share of financial Institutions and banks was only 22%.

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5.3 Underwriting of Public Issues during the Period of 1997-98 to
2008-09
The pattern of underwriting of public issues changed after October 1994, when
SEBI made underwriting optional for the issuing company. As the merchant banker (
in the capacity of lead manager) is responsible for the overall management of public
issues including appointment of underwriters, so analysis of the pattern of
underwriting activities during the period of study has significance in this context.
This section of chapter focuses on the trend of underwriting of public issues,
participation of different classes of underwriters, amount of public issues underwritten
by Indian and foreign based merchant bankers during the period from 1997-98 to
2008-09. During this period only one debt issue was underwritten for Rs. 56.78 crore
in 1999-2000. Other companies going to public for debt issues did not prefer to
underwrite their issues. So in this section, underwriting of equity issues has been
analysed.
5.3.1 Pattern of Public Issues Underwritten during 1997-98 to 2008-
09
Primary capital market in India remained stagnant from 1997-98 to 2002-03
and so was the underwriting activities. During this period, public issue market was
dominated by debt issues of bonds and debentures mainly by two financial
Institutions, that is, ICICI Ltd and IDBI Ltd. These issuers did not appoint any
underwriter for their issues. Even in public issue of equity shares, most of the issuers
did not prefer to underwrite their public issues. So, underwriting activities were
limited during this period. Merchant bankers have to go for alternative business
during this period. Primary market got a boost from 2003-04 onward and the pattern
of issue market changed from the dominance of debt issues to equity issues.
Table 5.3 provides information on the pattern of underwriting of equity shares
during the period from 1997-98 to 2008-09.

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 Table 5.3
Public Issues of Equity Floated and Underwritten
(Amount in Rs. Crore)
Year Total Equity Issues floated Equity Issues Proportion of Equity
Underwritten Underwritten
No. Amount Average No. Amount Average % %
of No. Amount
1997-98 58 1,132.00 19.52 10 268.55 26.85 17.24 23.72
1998-99 22 504.02 22.9 7 158.48 22.64 31.81 31.44
1999-00 55 2,975.25 54.09 18* 2,158.66** 119.92 32.72 72.55
2000-01 115 2,483.76 21.6 19 1,542.08 81.16 16.52 62.08
2001-02 6 1082.00 180.33 2 908.52 454.25 33.33 83.97
2002-03 6 1,038.68 173.11 2 254.84 127.42 33.33 24.53
2003-04 29 17,820.98 614.52 14 16,485.22 1,177.51 48.28 92.50
2004-05 29 21,431.56 739.02 20 21,029.88 1,051.49 68.96 98.13
2005-06 102 23,675.70 232.11 81 22,398.48 276.52 79.41 94.60
2006-07 85 24,993.37 294.04 74 24,164.68 326.55 87.06 96.68
2007-08 90 52,219.00 580.21 79 50,608.34 640.61 87.78 96.91
2008-09 21 2,034.00 96.86 17 1,959.92 115.29 80.95 96.36
Total 618 1,51,390.32 244.97 325 1,41,937.65 436.73 52.59 93.76
Note: - * This number includes one issue of debt.
** This includes amount of debt issue of Rs. 56.78 crore.
Source:- Compiled from offer documents of companies, SEBI website and Prime
Directories of relevant years.
It has been found from the table 5.3 that out of total 618 equity issues floated,
only 325 issuers preferred to underwrite their public issues of equity. The percentage
share of number of equity issues underwritten varied from 16.52% in 2000-01 to
87.78% in 2007-08. The largest number of equity issues were underwritten in 2005-06
(81) and 2007-08 (79). Total amount of equity issues underwritten was Rs.
1,41,937.65 crores out of Rs. 1,51,390.32 crore mobilised through equity shares
during the period under review. The largest annual amount of Rs. 50,608.34 crore was
underwritten in 2007-08 followed by Rs. 24,164.68 crores in 2007-08. The percentage
share of amount of equity issues underwritten varied from 23.72% in 1997-98 to
98.13% in 2004-05. An increasing trend in the amount of underwriting of equity
shares was found during the period under review and more than 90% of the amount
was found to have underwritten after 2003-04.

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 The average size of issues underwritten has been found higher than the
average size of equity issues floated in all the years except 2002-03. The aggregate
average size of equity issues floated during the period of study stood at Rs. 244.97
crore, while the average size of issues underwritten was Rs. 436.73 crore. It may,
thus, be concluded that the issues of comparative large size was underwritten and
underwriters did not show much interest to underwrite equity issues of small size.
This has been further proved by the analysis of year-wise average size of equity issues
floated and underwritten.
Relationship between amount of equity issues floated and the amount
underwritten has also been shown in the following chart.

Chart 5.1
Amount of Public Issues Raised and Underwritten

5.3.2 Classes of Underwriters in Public Issues of Equities

There are a number of classes of agencies providing underwriting services in
primary market in India. These include private merchant bankers, financial
institutions and development banks, commercial banks and their subsidiaries, and
brokers of stock exchanges. Different classes of underwriters differ in their approach
and attitude towards underwriting. Participation of financial institutions and
development banks in underwriting activities is guided by their long term investment
policy. On the other hand, merchant bankers, banks and stock exchange brokers put

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primary emphasis on short term prospects, as they cannot afford to block large funds
for long period of time.
As observed from the offer documents for equity issues floated during the
period under review, two or more underwriters have jointly underwritten majority of
equity issues floated. So, it was found difficult to assign a particular equity issue to a
single underwriter and number of equity issues has not been assigned to different
classes of underwriters.
Year wise amount of equity issue underwritten by different classes of
underwriters along with the percentage share in total amount underwritten during the
period of study is presented in table 5.4

Table 5.4
Public Issues of Equities Underwritten by Different Classes of Underwriters
(Amount in Rs. Crores)
Year Private merchant Financial Banks and Brokers (Stock Total Amount
Bankers Institutions Subsidiaries Exchange Underwritten
Amount % Amount % Amount % Amount % Amount
1997-98 95.00 35 110.00 41 61.00 23 2.55 1 268.55
1998-99 29.00 18 122.00 77 6.00 4 1.48 1 158.48
1999-00 1,632.41 76 422.86 20 75.98 3 27.41 1 2,158.66
2000-01 1,088.48 71 412.07 27 1.99 - 39.54 2 1,542.08
2001-02 834.52 92 60.00 7 13.50 1 0.50 - 908.52
2002-03 254.84 100 - - - - - - 254.84
2003-04 14,671.85 89 - - 1,813.37 11 - - 16,485.22
2004-05 15,773.00 75 - - 2,944.00 14 2,312.88 11 21,029.88
2005-06 18,366.75 82 - - 3,135.78 14 895.95 4 22,398.48
2006-07 18,848.45 78 - - 2,899.76 12 2,416.47 10 24,164.68
2007-08 42,492.43 84 - - 6,876.91 14 1,239.00 2 50,608.34
2008-09 1,572.10 80 - - 140.69 7 247.13 13 1,959.92
Total 1,15,658.83 81.48 1,126.93 0.79 17,968.98 12.65 7,182.91 5.06 1,41,937.65
Source: Compiled from offer documents, Prime Directories of relevant years.

As shown in the table 5.4, a lions share in the underwriting of equity issues
has been procured by private merchant bankers during the period from 1997-98 to
2008-09. They were able to underwrite an aggregate amount of Rs. 1,15,658.38 crore
(81.48%) out of Rs. 1,41,937.65 crore underwritten during this period. The percentage
share in total amount underwritten by private merchant bankers varied between 18%

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in 1998-99 to 100% in 2002-03. The largest amount of Rs.42,492.43 crore was
underwritten by private merchant bankers in 2007-08. This was followed by
commercial banks and their subsidiaries with a share of 12.65% of total amount
underwritten. Their proportionate contribution in total amount underwritten has been
fluctuating up to the year 2002-03. However, it remained generally steady (11% to
14%) from 2003-04 onward. Financial Institutions like IFCI Ltd. were found to be
active during the first half of the period under review and it had underwritten even
upto 77% of amount during 1998-99. These institutions were active till the year 2001-
02 and remained away from underwriting business afterward. These institutions could
underwrite an aggregate amount of Rs. 1126.93 crore (0.79% of the total) only.
Stock exchange brokers who participated in underwriting activities on adhoc
basis, managed to underwrite 5.06% of total amount underwritten during this period.
However, they were more active during the latter years of period under review.
Among the stock brokers Karvy Stock Broking Ltd., Enam Securities Pvt. Ltd.,
Keynote Capital Ltd., Kotak Securities and Almondz Global Securities played
dominating role in the business of underwriting of public issues.
Amount underwritten by various classes of underwriters have also been shown
in the following pie chart
Chart 5.2
Amount of Public Issues Underwritten by Various Classes of Underwriters

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5.3.3 Public Issues of Equity Underwritten by Lead Merchant
Bankers
SEBI provisions have made it mandatory for a lead manager to undertake in
respect of every underwritten issue, a minimum underwriting obligation of 5% of the
total underwriting commitment or Rs. 25 lakhs, whichever is less. If he is unable to do
so, he has to make arrangements for underwriting an equal amount by a merchant
banker associated with that issue under intimation to the SEBI. SEBI provisions also
state that the outstanding underwriting commitment of a merchant banker should not
exceed twenty times of its net worth at any point of time.
Merchant bankers have played a lead role not only in the management of
public issues but also in underwriting of public issues. From the analysis of offer
documents for public issues, multiple merchant bankers have been found to have
underwritten the public issues during the period under review.
Table 5.5 gives the details of the public issues underwritten by Indian and
foreign based merchant bankers operating in India.

Table 5.5
Public Issues Underwritten by Indian and Foreign Lead Merchant Bankers
Amount in Rs. crore)
Year Indian Merchant Foreign Merchant Total
Banks Banks
Amount % Amount % Amount % of total
1997-98 201.00 74.8 31.24 11.7 232.24 86.48
1998-99 103.60 65.4 9.60 6.0 113.20 71.42
1999-00 1,264.22 58.6 808.10 37.4 2,072.32 96.00
2000-01 1,308.47 84.8 194.08 12.6 1,502.55 97.44
2001-02 74.00 8.1 834.52 91.9 908.52 100
2002-03 107.85 42.4 146.97 57.6 254.82 100
2003-04 7,039.67 42.7 9,445.55 57.3 16,485.22 100
2004-05 7,859.30 37.4 10,928.11 51.9 18,787.41 89.34
2005-06 11,082.49 49.5 10,420.04 46.5 21,502.53 96.00
2006-07 9,282.03 38.4 12,466.18 51.6 21,748.21 90.00
2007-08 25,558.87 50.5 23,810.00 47.05 49,369.34 97.55
2008-09 1,574.35 80.32 138.44 7.06 1,712.79 87.39
Total 65,455.85 46.12 69,233.30 48.77 1,34,689.15 94.89
Source: - Compiled from offer documents of companies, Prime Directories of various
years.

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 Table 5.5 provides year wise information on the amount and percentage share
of total amount underwritten by Indian and foreign based merchant bankers. A total of
134,689.15 crore of equity amount was underwritten by lead merchant bankers in
India during the priod of study. This amount stood at 94.89% of the total amount of
Rs. 1,41,937.65 crore underwritten during the period under review. Out of this, an
aggregate amount of Rs. 65,455.85 crore (46.12%) was underwritten by Indian
merchant bankers, while the share of foreign merchant bankers stood at Rs. 69,233.30
crore (48.77%) during the period from 1997-98 to 2008-09. As visible from the table,
Indian merchant bankers were ahead in providing underwriting services in public
issues during first four years of period under study. However, from 2001-02 onward,
proportionate share of Indian merchant bankers declined and they were superseded by
foreign merchant bankers. The Indian merchant bankers again dominated in the year
2007-08 and 2008-09. Indian merchant bankers were able the secure the business of
50.5% and 80.32% of the total amount underwritten during 2007-08 and 2008-09
respectively. However, bearish trend in primary market and small sized equity issues
in 2008-09 kept the foreign merchant bankers away from the underwriting activities.
Total amount underwritten by Indian and foreign merchant banks during the
period from 1996-97 to 2008-09 has also been shown in the following chart

Chart 5.3
Total Amount Underwritten by Indian and Foreign Merchant Bankers

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5.3.3.1 Public Issues Underwritten by Indian Merchant Bankers
Table 5.5A exhibits year wise amount of public issues underwritten by
individual lead managers. As revealed in the table, Kotak Mahindra Capital Co. Ltd
has underwritten maximum amount of public issues floated in each year. It has been
on the top of the list by performing aggregate underwriting obligations to the tune of
Rs. 20,544.73 crore during the period under review. This amount stood at 14.47 % of
the total amount underwritten.
Enam Financial Services Ltd followed Kotak Mahindra by underwriting Rs.
13,346.35 crore (9.40%). Other prominent lead managers who actively participated in
equity share underwriting included ICICI Securities Ltd with Rs. 13,317.98 crore
(9.38%), IL&FS Merchant Banking Services Ltd. with Rs. 1456.38 crore (1.02%),
Allianz Securities Rs. 1,340.61 crore (0.94%), Karvy Investors (Rs. 832.53 crore) and
Anand Rathi Securities with a total amount of Rs. 823.53 crore.
SBI Capital Markets Ltd underwrote Rs. 5,111.24 crore (9.40%) of public
issues amount floated during the period of study. Other public sector banks or their
subsidiaries which figured in the list of top lead managers as underwriters included
BOB Capital Markets Ltd and Canara Bank with a meagre amount of Rs. 89.30 crore
and Rs. 25.80 crore respectively underwritten during the period of study. Similarly,
IDBI Ltd remained active during the initial years only and was able to underwrite an
amount of Rs. 511.55 crore.
A large number of merchant bankers from the category of other merchant
bankers have been involved in the underwriting of a very tiny amount of public
issues. These merchant banks underwrote a total sum of Rs. 6,301.97 crore during the
entire period of study which stood at just 4.44% of the total amount of equity issues
underwritten during this period.

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136
 Total amount of public issues underwritten by top Indian merchant bankers
during the period under review has also been shown in chart 3.4

Chart 5.4

5.3.3.2 Public Issues Underwritten by Foreign Merchant Bankers

Foreign merchant bankers have not only played prominent role as lead
managers, co managers and advisors to the public issues, but also in underwriting of
public issues during the period under review. Performance of foreign based merchant
bankers with respect to their involvement in the underwriting of equity issues has
been shown in Table 5.5B.
It could be seen from the table that during period of study, equity shares
amounting to Rs. 69,233.30 crore were underwritten by foreign based merchant
bankers. This amount was 48.47 % of the gross amount underwritten. Among the
foreign lead managers, DSP Merrill Lynch has been on the top of the list by securing
underwriting business of Rs. 22,247.94 crore (15.67%). Starting its underwriting
activities in primary market in India from the year 1998-99, its share stood at 41.30%
of the total amount underwritten during the year 2001-02 and 23% in 2003-04.

137
138
 Another international investment banker, JM Morgan Stanley closely followed
DSP Merrill Lynch in underwriting activities of public issues. It was able to procure
the underwriting business of Rs. 22,205.40 crores (15.64%) during this period of
study. Citi Group Global and HSBC Securities & Finance (India) Ltd. figured in the
latter part of the period and undertook Rs. 5,699.65 crore (4.01%) and Rs.2,375.36
crore(1.67%) respectively for underwriting the public issues. UBS Securities India
Ltd. and Deutsche Equities India participated in underwriting for three years and
underwrote a sum of Rs. 3,554.11 crore (2.50%) and 3837.89 crores (2.70%)
respectively. ABN Amro Securities could fetch a total business in underwriting of
public issues to the tune of Rs. 2059.69 crore (1.45%%) only. Similarly JP Morgan
India Ltd., though erratic in nature, underwrote public issues amounting to Rs.
2,765.32 crore (1.95%) including Rs. 2009.14 crore in 2007-08.
On the other hand, a sum of Rs. 3,862.27 crore (2.72%) only was underwritten
by other foreign merchant bankers. These merchant banks participated in
underwriting in only one public issue for one year only. These foreign merchant
bankers included Saloman Smith Barney (India) Ltd, Standard Chartered Bank,
Goldman Sach (India) Securities and Weizmann Capital Ltd.
Overall performance of foreign merchant bankers in underwriting activities in
the primary capital market in India has been significant in the latter half of the period
under review during which their proportionate share in total underwriting was
generally above fifty percent. They were able to underwrite 91.90% of the total
amount in 2001-02. However, due to depressed market conditions in 2008-09, foreign
merchant bankers did not participate in underwriting activities.
Chart 5.5 presents the amount of public issues underwritten by foreign
merchant bankers during the period from 1997-98 to 2008-09.

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 Chart 5.5

7.4 Under subscription and Devolvement on Underwriters

During the period of twelve years from 1997-98 to 2008-09, a total of 325
public issues of equity with an aggregate amount of Rs. 1,41,937.65 crore have been
underwritten. The underwritten public issues generally got favourable response from
the public and were oversubscribed. However, a total of five underwritten public
issues were undersubscribed and devolved on underwriters. These public issues have
been listed in table 5.6
Table 5.6
Under Subscription and Devolvement
Year Issuer company Issue size Lead Managers Underwriters
(Rs. crore)
2000-01 Hughes Tele.com 749.21 Kotak Mahindra ICICI Sec. , IDBI,
IT&T Ltd. 31.67 JM Morgan, JM Morgan
Enam Financial Enam Financial
Services Services
2001-02 South Asia Petro 180.00 IDBI, SBI Caps IDBI , Enam
Chem. financial,
SBI Capital Markets,
2006-07 Cairn India Ltd. 5,722.00 DSP Merrill, ABN Amro, DSP
ABN Amro Merrill, JM Morgan,
Citigroup
Vijayeswari 90.00 IDBI Capital Services, IDBI Capital Services
Textiles Ltd. IL&FS Investsmart IL&FS Investsmart
Ltd. Ltd.
Source: - Compiled from offer documents, Basis of Allotment.

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 Table 5.6 exhibits the list of undersubscribed public issues along with their
lead managers and underwriters. It has been found that lead merchant bankers also
acted as underwriters except one issue (Hughes Tele.com) during 2000-01. During
2000-01, 10% retail book built portion of mega issue of Hughes Tele.com was
subscribed by only 0.15 times although its institutional portion was oversubscribed.
The allocation for the retail book built portion was 1,42,40,400 shares against
9,36,51,400 shares available. The under subscribed portion of 7,94,11,00 shares was
allocated to institutional category. Also the fixed price issue of IT&T Ltd. was
subscribed to 0.994 times and the undersubscribed portion of the issue was devolved
on underwriters.
In 2001-02, one issue out of six public issues, was undersubscribed and its
underwriters, IDBI Ltd., Enam Financial Services and SBI Capital Markets. has to sail
it through.
In the year 2006-07, a poor public response was also found for the 30% retail
portion of mega issue of Cairn India Ltd., which was subscribed only 0.676 times.
This undersubscribed portion was also devolved on the underwriters. Similarly the
retail portion of public issue of Vijayeswari Textile Ltd. was subscribed by 0.216
times and underwriters had to subscribe the unsubscribed portion of this issue.
Conclusion
To sum up, underwriting of public issues by merchant bankers has assumed a
great significance and urgency in primary market in India. Even after October, 1994,
when underwriting of public issues were made non mandatory by SEBI, its role has
not come down in Indian capital market. It has contributed positively for the
development of primary market in India by increasing the confidence of both
promoters as well as investors. The first half of the period under study was dominated
by debt issues especially bond issues by ICICI Ltd. and IDBI Ltd. But they did not
prefer to underwrite their debt issues. So underwriting has been limited to the equity
and equity related instruments. More than 90% of amount of public issues of equity
shares was underwritten from the year 2003-04 onward.
Different classes of underwriters have been found to have participated in the
underwriting activities during the period under review. However, private merchant
banks, along with performing the functions of lead managers in the management of
public issues, have also participated actively in the underwriting of public issues.

141
They were able to underwrite 81.48% of the total amount underwritten during the
period under study. Other players in the underwriting of public issues included All
India financial institutions, commercial banks and their subsidiaries and stock
exchange brokers. Every class of underwriters has their own motive and policy of
underwriting.
Active participation of foreign merchant bankers was found in underwriting
activities of public issues of equities. These merchant bankers have been found to
have dominating role after the period starting from 2001-02 and were able to secure
48.77% of total amount underwritten. Indian merchant bankers closely followed
foreign merchant bankers with 46.12% share. Among the foreign merchant banks, JM
Morgan and DSP Merrill Lynch accounted for 31.31% of the total amount
underwritten and have participated during all the years covered in the study.
Top ranking Indian merchant bankers which included Kotak Mahindra Capital
Co., Enam Financial Services and ICICI Securities Ltd together contributed 33.25%
of the total amount underwritten. Among the public sector banks and their
subsidiaries, SBI Capital Markets Ltd has actively participated in the underwriting of
public issues. BOB Capital Markets and Canara Bank also showed their presence in
underwriting activities.
Analysis of public response to underwritten public issues have shown that out
of total 325 equity issues underwritten during the period, only five remained
undersubscribed and devolved on the underwriters.
From the offer documents of underwritten public issues, it has also been found
that syndicate underwriting has been in practice in Indian primary market. A few
small issues have been underwritten by single underwriters. It has also been noticed
that the lead manager(s) to the individual public issue also participated actively as
underwriter in that very particular public issue. So it may be concluded that apart
from shouldering the responsibility of management of public issues, merchant bankers
have also participated actively in the underwriting of public issues.

142
 REFERENCES

1. Dolvin Steven, Do Underwriters Create Value for Issuers by Subjectively

Determining Offer Prices? Initial Public Offerings - An International
Perspective, (edited), Elsevier, Oxford, 2006.
2. Machiraju, H.R., Merchant Banking- Principles and Practice, New Age
International, New Delhi, 2004. p.227
3. Kuchal, S.C., The Industrial Economy of India, Chaitanya Publishing, 1959.
4. Cirvante, V.R., The Indian Capital Market, Oxford, Bombay, 1956, p.80
5. Ibid, p.81.

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 Table 5.5 A
Public Issues Underwritten by Indian Merchant Banks
(Rs. in Crore)
Merchant Banks
Total
BOB Other
Kotak Enam SBI IL&FS Allianz Karvy UTI Tata Canara amount
Years ICICI Sec. Anand Edelweiss cap. Indian
Mahindra Fin. Caps. mer. Securities Investors Sec. IDBI Fin. Bank by Indian
Rathi Market MBs
MBs
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
6.25
7.05 9.75 19.75 11.80 52.00 9.95 13.50 13.75 57.21 201.01
1997-98 (2.3) - - - - -
(2.6) (3.6) (7.3) (4.4) (19.4) (3.7) (5.1) (5.1) (21.3) (74.8)
4.95 5.32 4.50 34.50 52.83* 103.60
1998-99 - - - - - - - - - 1.50
(3.1) (3.3) (3.0) (21.7) (33.3) (65.4)
533.84 351.16 116.11 21.51 22.2 31.22 22.05 133.87 1,264.22
1999-00 - 14.71 - - 10.00 - 7.55
(24.7) (16.0) (5.4) (1.0) (1.0) (1.4) (1.0) (6.16) (58.6)
481.44 362.12 82.53 31.81 22.08 82.6 24.97 34.28 186.64 1,308.47
2000-01 - - - - - -
(31.2) (23.5) (5.30) (2.0) (1.40) (5.30) (1.60) (2.2) (12.6) (84.8)
22.5 48.5 74.00
2001-02 - - - - - - - - - - - - 3.00
(2.5) (5.28) (8.10)
85.42 22.43 107.85
2002-03 - - - - - - - - - - - - -
(33.51) (8.63) (42.4)
4,732.04 1,446.20 406.53 394.47 7,039.67
2003-04 30.04 - - - - - - - - 30.39
(28.7) (8.8) (2.5) (2.4) (42.7)
3,601.19 2,814.02 852.10 190.18 7,859.30
2004-05 147.74 143.99 - 17.50 19.50 - - - - - 73.08
(17.1) (13.4) (4.5) (0.9) (37.4)
2,720.58 1,996.17 2,322.08 1319.09 703.54 249.65 561.64 154.28 205.25 239.61 510.8 11,082.49
2005-06 80.00 - 19.80
(12) (8.8) (10.2) (5.8) (3.1) (1.1) (2.4) (0.6) (0.9) (1.0) (2.27) (49.5)
1,887.22 1,899.14 2,666.69 858.76 431.11 355.78 116.52 243.52 287.10 251.93 9,282.03
2006-07 103.20 - 56.00 125.06
(7.8) (7.9) (11.0) (3.6) (1.8) (1.4) (1.0) (1.2) (1.0) (38.4)
6,358.31 4,444.22 6,893.26 2,359.92 442.22 117.58 224.21 529.89 163.45 4,025.81 25,558.87
2007-08 - -
(12.5) (8.8) (13.6) (4.7) (0.9) (.23) (.44.0) (1.0) (32.0) (7.95) (50.5)
138.44 148.97 69.79 138.44 20.93 1,057.78 1,574.35
2008-09 - - - - - - - - -
(7.06) (7.60) (3.56) (7.06) (1.06) (53.97) (80.32)
20,544.73 13,317.98 13,346.35 5,111.24 1,456.38 1,340.61 823.12 528.15 1,159.87 511.55 6,301.97 65,455.85
Total (0.58) 66.28 89.30 25.80
(14.47) (9.38) (9.40) (3.60) (1.02) (0.94) (0.57) (0.37) (0.81) (0.36) (4.44) (46.12)
Note: - Figures in parentheses denote the percentage of amount of public issues underwritten during the respective year.
* This amount includes RS. 33.60 crore underwritten by IFCI Ltd.
Source: - Compiled from offer documents of companies, Prime directories of various years.

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 Table 5.5 B
Public Issues of Equity Underwritten by Foreign Merchant Bankers
(Rs. in crore)
Merchant Bankers
JM Morgan DSP HSBC Sec. City Group ABN Amro UBS Sec. Deutsche JP Morgan CLSA Peregrime Others Total amount
Year
Stanley Merrill & finance Global Securities India Equities India India Capital MBs. Underwritten by ForeignMBs
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
24.99 6.25 31.24
1997-98 - - - - - - - - - (9.3) (2.3) (11.7)
6.45 3.15 9.6
1998-99 - - - - - - - -
- (4.0) (2.0) (6.0)
343.50 428.12 34.45 808.1
1999-00 - - - - 2.03 - -
(15.8) (19.8) (1.5) (37.4)
123.64 45.92 194.08
2000-01 7.02 - - - 5.00 - - 12.5
(8.0) (3.0) (12.6)
375.31 375.81 83.40 834.52
2001-02 - - - - - - -
(41.3) (41.3) (9.14) (91.9)
62.99 31.49 52.49* 146.97
2002-03 - - - - - - - -
(24.0) (12.20) (20.7) (57.6)
4,492.29 3,789.24 1137.46 9,445.55
2003-04
(27.2) (23.0) (6.9) 26.56 - - - - - - - (57.3)
4,484.78 4,580.87 316.55 316.55 316.55 316.55 542.05 10,928.11
2004-05
(21.30) (21.8) (1.5) - (1.5) (1.5) (2.7) 54.21 - - (51.9)
4,624.13 4,475.38 421.37 549.53 200.00 149.63 10,420.04
2005-06
(20.4) (19.7) (1.9) (2.4) (0.8) - - - (0.6) - - (46.5)
3,773.18 4,010.80 492.96 1,282.81 1,776.29 478.35 447.84 203.95 12,466.18
2006-07
(15.6) (16.6) (2.0) (5.3) (7.4) (1.9) (1.8) (0.8) - - - (51.6)
3,925.58 4,503.86 3,524.20 2,759.21 3,073.50 2,009.14 396.84 3,618.14 23,810.47
2007-08
(7.76) (8.9) - (6.96) - (5.4) (6.1) (4.0) (0.78) - (7.15) (47.05)
138.44 138.44
2008-09
- - - - - - - - - - (7.06) (7.06)
22,205.40 22,247.94 2,375.36 5,699.65 2,059.69 3,554.11 3,837.89 2,765.32 600.68 3,862.27 69,233.30
Total
(15.64) (15.67) (1.67) (4.01) (1.45) (2.50) (2.70) (1.95) (0.42) 24.99 (2.72) (48.47)
Note: - Figures in parentheses denote the percentage of amount of public issues of equity underwritten during the respective year.
* This amount was underwritten by Saloman Smith Barney (India) Ltd.
Source: - Compiled from offer documents of companies, SEBI website and Prime Directories of various years.

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