Underwriter

“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. (SEBI)

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 Underwriter
 A company or other entity

Administers the public issuance and distribution

of securities from issuing body.

Works closely to determine the offering price

Buys them from the issuer and sells them to investors via the
underwriter's distribution network.

Underwriting Commission charged

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 Types of Underwriters
 SEBI registered merchant bankers

 Development banks like IFCI, ICICI and IDBI

 Institutional investors like LIC and AXIS

 Financial and development corporations

 Investment and insurance companies and stock-brokers

 Regsitered underwriters under SEBI (underwriter) rule

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 Types of Underwriters
• Allahabad Bank
• Anand Rathi Securities Pvt Ltd
• Bank Of India
• BOB Capital Markets Ltd
• Canara Bank
• Cazenove India (Holdings) Private Limited
• Citicorp Brokerage (India) Ltd
• Credit Agricole Indosuez
• Credit Suisse First Boston (India) Securities
• DSP Merrill Lynch Ltd
• Enam Financial Conslts.Pvt.Ltd
• Export Import Bank , Global Trust Bank Ltd , ICICI

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 Content of Underwriting Agreement
 Legal Contract

 Period during which the agreement is in force,

 Amount of underwriting obligations

 Period within which the underwriter has to subscribe to the

issue after being intimated by the issuer,

 Commission (not to exceed 5% on shares and 2.5% on

debentures.

 Commission payable irrespective of devolvement

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 UNDERWRITING – INDIA

 NO. OF UNDERWRITERS DECIDED BY ISSUER

 LEAD MGRS ARRANGES UNDERWRITING

 LEAD MGRS TO SATISFY WITH NET WORTH OF

UNDERWRITERS

 UNDERWRITERS CAN ARRANGE SUB UNDRWTG

AT HIS RISK

 UNDERWRITING AGRMT FILED WITH STOCK

EXCH
 UNDERWRITING – INDIA
 LEAD MGR IN CONSULTATION WITH COMPANY
ARRANGES UNDERWRITG ON FOLLWG FACTORS

 FINANCIAL STRENGTH (MAJOR COSIDERATION)

 EXPERIENCE IN PRIMARY MARKET

 PAST UNDERWRITING PERFORMANCE

 UNDERSTANDING UNDERWRITING COMMITMENTS

 NETWORK OF INVESTOR CLIENTELE

 OVERALL REPUTATION
 UNDERWRITING – INDIA
 UNDERWRITER ON OTHER HAND ASSESSES

 COMPANY’S STANDING & RECORD

 COMPETENCE OF THE MANAGEMENT
 WORTH OF THE PUBLIC ISSUE
 OBJECT OF THE ISSUE
 PROJECT DETAIL
 OFFER PRICE
 OTHER TERMS OF THE ISSUE
 OFF BALNCE SHEET LIABILITIES
 EXPECTED MARKET RESPONSE TO PUBLIC ISSUE
 THEIR OWN ABILITY TO GET THE ISSUE FULLY
SUBSCRIBED
 UNDERWRITING – INDIA
 UNDERWRITING OPTIONAL SINCE OCT 1994
 IF ISSUE NOT UNDERWRITTEN & 90% OF AMT NOT
COLLECTED WITHIN 60 DAYS OF OPENING OF THE
ISSUE - ENTIRE AMT COLLECTED IS REFUNDED

 ABOVE NOT APPLIED FOR DEBT ISSUES WITH

ADEQUATE DISCLOSURES OF ALTERNATE FINANCING
 UNDERWRITING – INDIA

UNDERWRITING, HOWEVER, ADVISABLE

 ASSURANCE OF FUNDS IN ADVERSE OUTCOMES

 LEAD MGRS INSIST FULL UNDERWRTG IN LARGE ISSUES

 TERM LENDERS & BANKS INSIST FOR PROJECT BASED

ISSUES

 RELIEVES COMPANY OF RISK & UNCERTAINITY OF

MARKETING THE SECURITIES
 Types of Underwriting Agreements
Syndicate Underwriting:-

 Two or more agencies or underwriters jointly underwrite an

issue of securities.

 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.

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 Types of Underwriting Agreements
Sub-Underwriting:-

 Underwriter gets a part of the issue further underwritten by

another agency.

 Done to diffuse the risk involved in underwriting.

 Name of every under-writer is mentioned in the prospectus

along with the amount of securities underwritten by him.

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 Types of Underwriting Agreements
Contingent-Underwriting:-

 IN PUBLIC ISSUE 5% NORMALLY RESERVED FOR

ALLOTTMENT ON PREFERENTIAL BASIS TO EMPLOYEES

 IF RESERVED QUOTA NOT FULLY SUBSCRIBED,

UNSUBSCRIBED PORTION GENERALLY ADDED TO
BALANCE OF PUBLIC ISSUE COMPONENT

 UNDERWRITING ARRANGEMENT TO COVER AGAINST

SUCH AN EVENTUALITY IS CONTINGENT
UNDERWRITING
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 Types of Underwriting Commitment
Conditional Underwriting

 Takes unsubscribed portion.

 If fully subscribed by public, does not take any shares

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 Types of Underwriting Commitment
Firm Underwriting
 Apply for a 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.

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 Types of Underwriting Commitment
Partial Underwriting
 Issue not underwritten wholly
 Co issues 20000 shares. Underwriter guarantees subscribed
of 15000 shares . Underwiter’s liability arises only if pub
subs falls short of 15000 shares.
 If more than one underwriter liability determined in ratio
of shares underwritten
 A,B,C underwrite an issue of 60000 shares to extent of
15000, 25000 & 10000. If pub subscribed 45000 shares
shortfall of 5000 (50000-45000) to be taken by underwriter
in 3:5:2 i.e A = 1500; B = 2500 & C = 1000 shares
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 UNDERWRITING APPLICATIONS - TYPES

 If multiple underwriters in an issue

 Each tries to sell securities to reduce risk
undertaken by him (best effort basis)
 Put their own stamp/seal in prescribed application
form forwarded by them
 For easily ascertaining number of shares subscribed by
public through each of them
 Known as Marked application
 Bear stamp of underwriter
 If issue not fully subscribed, marked app reduces his liability
 UNDERWRITING APPLICATIONS - TYPES

 Unmarked Applications
 Bear no stamp of underwriter
 Received by company directly from public without
any underwriter
 If more than one underwriters, unmarked app divided
amongst them in ratio of their gross liability
 UNDERWRITING LIABILITY

Underwritten

Fully Partially
underwritten underwritten

Without firm With Firm Without firm With Firm

underwriting underwriting underwriting underwriting
 UNDERWRITING LIABILITY
 Issue fully underwritten (without firm underwriting)
 By one underwriter
 Both marked & unmarked deducted from shares underwritten
 Resultant figure treated his liability

 E.g. Co issued 100000 eq shares of Rs 10 each.

100% underwriting by A. Co. recvd app for 80000
sh with 60000 marked app.
 A liability = 100000-60000-20000 = 20000 sh
 A gets full credit for unmarked 20000 sh
 UNDERWRITING LIABILITY
 Issue fully underwritten (without firm underwriting)
 By more than one underwriter
1. Unmarked app needs to be divided in ratio of gross liability
of individual underwriters
STEPS (e.g.1a)
 Compute gross liability on basis of agreed ratio
 Subtract marked app from gross liability of each underwriter
 Determine number of unmarked app (Total app – Mkd app)
 Divide unmarkd app in ratio of gross liability of underwriters
 If resultant fig positive or zero, stop here
 If resultant fig negative, add all negative figs then divide resultant
between underwriters having positive figure in ratio of gross liability
 UNDERWRITING LIABILITY
 Issue fully underwritten (without firm underwriting)
 By more than one underwriter
1. Unmarked app needs to be divided in ratio of gross liability
of individual underwriters
X issued 100000 sh. 100% underwritten by X,Y,Z (40:30:30).
80000 sh recvd in all with marks of (X-20000, Y-10000, Z-
20000). 30000 sh did not bear any stamp. Show liability of each
Underwriter X(40%) Y (30%) Z (30%)
Gross Liab (40:30:30) 40000 30000 30000
Less: Mkd app 20000 10000 20000
20000 20000 10000
Less: Unmarked (4:3:3) 12000 9000 9000
Net liability 8000 11000 1000
 UNDERWRITING LIABILITY
 Issue fully underwritten (without firm underwriting)
 By more than one underwriter
2. Unmarked app needs to be divided in ratio of gross liability
(less marked app) of individual underwriters
STEPS (e.g.1b)
 Compute gross liability in usual manner
 Subtract marked application from gross liability
 Determine number of unmarked app
 Divided above in ratio of gross liab less markd app
 If resultant fig positive or zero, stop here
 If resultant fig negative, add all negative figs then divide resultant
between underwriters having positive figure in ratio of gross liability
less marked app
 UNDERWRITING LIABILITY
 Issue fully underwritten (without firm underwriting)
 By more than one underwriter
2. Unmarked app needs to be divided in ratio of gross liability
(less marked app) of individual underwriters
X issued 100000 sh. 100% underwritten by X,Y,Z (40:30:30).
80000 sh recvd in all with marks of (X-20000, Y-10000, Z-
20000). 30000 sh did not bear any stamp. Show liability of each
Underwriter X(40%) Y (30%) Z (30%)
Gross Liab (40:30:30) 40000 30000 30000
Less: Mkd app 20000 10000 20000
20000 20000 10000
Less: Unmarked (2:2:1) 12000 12000 6000
Net liability 8000 8000 4000
 UNDERWRITING LIABILITY
 Issue fully underwritten (with firm underwriting)
 By more than one underwriter
1. Benefit of firm underwriting not given to individual underwriter

STEPS (e.g.2)
 Compute gross liability in usual manner

 Subtract marked app (excluding firm underwriting) from gross liab of

respective underwriter
 If some resultant fig negative add all neg fig & divide resultant in ratio of

gross liab
 Determine number of unmarked app as

 Total subs excludg firm underwtg -----

 Less: Mkd app excluding firm underwtg ------
 Unmarked app by public -------
 Add: App under firm underwrtg ------
 Total unmarked app -------
 Divide the above unamrked app in ratio of gross liab
 Add firm underwrtg with net liab as per agrmt
 UNDERWRITING LIABILITY
 Issue fully underwritten (with firm underwriting)
 By more than one underwriter
1. Benefit of firm underwriting not given to individual underwriter
X issued 20000 sh. 100% underwritten by A,B,C (12:5:3). Underwriters made app for
firm underwrtg as (A-1600, B-600, C-2000 sh). 10000 sh recvd excluding firm
underwtg but markd app as (A-2000, B-4000, C-1000). Show liability of each
Underwriter A B C
Gross Liab (12:5:3) 12000 5000 3000
Less: Mkd app (exclug firm undtg) 2000 4000 1000
10000 1000 2000
Less: Unmarked incldg firm(12:5:3) 4320 1800 1080
Net liability (Surplus) 5680 (800) 920
Less: B surp alloctd to A&C (12:3) (640) 800 (160)
Net Liability 5040 Nil 760
Add: Firm underwtg 1600 600 2000
Total Liability 6640 600 2760
 UNDERWRITING LIABILITY
 Issue fully underwritten (with firm underwriting)
 By more than one underwriter
2. Benefit of firm underwriting given to individual underwriter
STEPS (e.g.3)
 Compute gross liability
 Subtract mkd app (excdg firm undrtg) from gross liab of each underwriter
 Determine no. Of unmarked app as
 Total subs excludg firm underwtg -----
 Less: Mkd app excluding fir underwtg ------
 Unmarked app by public -------
 Divide unmkd app in ratio of gross liab
 Subtract firm underwrtg from above
 Find liability of each & add firm underwrtg with net liab
 UNDERWRITING LIABILITY
 Issue fully underwritten (with firm underwriting)
 By more than one underwriter
2. Benefit of firm underwriting given to individual underwriter
X issued 80000 sh. 100% underwritten by A,B,C (48:20:12). Underwriters made app
for firm underwtg as (A-6400, B-8000, C-2400 sh). 40000 sh recvd excluding firm
underwtg but markd app as (A-8000, B-10000, C-4000). Show liability of each
Underwriter A B C
Gross Liab (48:20:12) 48000 20000 12000
Less: Mkd app (exclug firm undtg) 8000 10000 4000
40000 10000 8000
Less: Unmarked excldg firm(48:20:12) 10800 4500 2700
29200 5500 5300
Less: Firm underwtg 6400 8000 2400
22800 (2500) 2900
Less:B surp to A&C (48:12) 2000 2500 500
Net Liability 20800 Nil 2400
Add: Firm undtg 6400 8000 2400
Total Liability 27200 8000 4800
 UNDERWRITING LIABILITY
 Issue partially underwritten (without firm underwriting)
 STEPS if done by one underwriter
 X issued 100000 eq sh at par. A agreed to undewriter 80% of
whole issue. Appl recvd for 70000 shrs out of which 50000
marked. Determine net liability of A
 Gross liab 80% of 10000 = 80000
 Less: Mkd app = 50000
 Net Liability = 30000
 If X recvd app of more than 10000 sh, A liability nil even if
mkd appl were less than gross liability
 If X recved appl for 90000 sh net liab of A would be
100000 – 90000 = 10000 shares
 If no information given for marked & unmarked app then
marked app = Total app recvd x % of underwriting i.e.
 Mkd App = 70000 x 80% = 56000
 UNDERWRITING LIABILITY
 Issue partially underwritten (without firm
underwriting)
 STEPS if done by more than one underwriter
 Compute gross liability of each underwriter in agreed
ratio
 Deduct marked applications of each underwriter from
their respective gross liability
 Balance treated as net liability
 UNDERWRITING LIABILITY
 Issue partially underwritten (without firm underwriting)
 STEPS if done by more than one underwriter
 X issued 100000 eq sh at par. Partially underwritten by A,B,C
(40:30:20). 80000 app recvd of which mkd app were A-35000,
B-26000 & C -14000 sh. Calculate liability of each underwriter
Underwriter A (40%) B (30%) C (20%)
Gross Liab (Sh) 40000 30000 20000
Less: Mkd app 35000 26000 14000
Net Liability 5000 4000 6000