TYPES OF UNDERWRITING

TORAN LAL VERMA

 TYPES OF UNDERWRITING

different types of underwriting are as follows:

  1. Firm underwriting: Firm underwriting is an underwriting agreement where an underwriter agrees to buy a definite number of shares or debentures in addition to the shares or debentures he has already promised to  subscribe under the underwriting agreement. In firm underwriting, the underwriters are liable to take up the agreed number of shares or debentures even if the issue is over subscribed.
  2.  Complete underwriting: when the whole issue of shares or debentures of a company is underwritten, it is called complete underwriting. In such a case the whole issue is underwritten either by an individual/institution agreeing to take the entire risk or by a number of firms or institutions, each agreeing to take the risk to a limited extent.
  3. Partial underwriting. When only a part of the issue of shares or debentures of a company is underwritten, it is known as partial underwriting. In such a case the part of the issue is underwritten either by an individual/institution or by a number of firms or institutions each agreeing to take the risk to a limited extent.
  4. Syndicate Underwriting: When the issue is very big and it is impossible to be underwritten by a single underwriter syndicate underwriting comes to rescue. In syndicate underwriting, few underwriting firms form a syndicate and jointly undertake to underwrite the issue. The amount to be underwritten and the ratio is determined in advance among the firms. For example, For an issue of 10,000 6 underwriters may form a syndicate and underwrite in the ratio of  30:20:20:10:10:10.
  5. Joint Underwriting: In Joint underwriting, when the issue is too large, the issuer company itself appoint more than one underwriter to reduce the burden from a single underwriter. Each Underwriter underwrites for a specified amount and in a specified ratio. It is different from a syndicate underwriting in a way that in Syndicate underwriting the underwriting firm themselves form a syndicate and represent themselves as single underwriting firm but in Joint underwriting, the issuer company itself appoint a number of firms to underwrite the issue.
  6. Sub-underwriting:  If an underwriter has promised to underwrite an issue and later on it feels that it is beyond his individual capacity, then he may appoint a sub-underwriter to safeguard himself. For example, if an underwriter A has underwritten for an amount of 40 crores, and later on he finds it difficult to underwrite single Handadley he may appoint a sub-underwriter to underwrite 10 crores. In this case, the sub-underwriter is liable to underwriter only and he has no connection with the company. the relationship between underwriter and sub-underwriter is same as an agent and sub-agent.

 

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