When a company offers shares to the public, it is mandatory requirement that minimum subscription must be achieved. Minimum subscription means that at least or more than 90% of the issue must be subscribed. If the minimum subscription is not achieved then the company has to return the amount received on the application and the issue will go in vain. the company will have to bear huge losses as it has incurred a lot of expenses for the appointment of various intermediaries, publication of the prospectus, marketing of issue etc. So to avoid this situation and ensure the company against this risk, the promoter appoint underwriters. these underwriters promise to subscribe to the shares and achieve minimum subscription non-subscription by the public.
Thus, Underwriting is a contract by which an individual/institution gives the company assurance that it will subscribe to the securities being offered, in case the public does not subscribe. The individual/institution which gives this assurance is known as an underwriter.
SEBI GUIDELINES FOR UNDERWRITING
- According to SEBI, the number of underwriters should be decided in advance by the issuer company.
- Prior approval must be taken from SEBI regarding the appointment of Underwriter.
- Permission will be granted by SEBI only after verifying the net worth of the underwriters, their outstanding commitments and other norms prescribed by SEBI for underwriters.
- The underwriter must be registered with SEBI.
- It is the company’s responsibility that it must inform about the arrangements made with the underwriters to the stock exchange where the security is going to be listed.
- As per the original Guidelines issued by SEBI on 11.6.1992, underwriting was mandatory for the full issue. However, as per the Revised Guidelines issued by SEBI on 10.10.94, underwriting is not mandatory now and the issuers have the option of deciding whether the issue is to be underwritten or not.
- Total underwriting obligation of an underwriter cannot exceed 20 times of his net worth.
- It is the duty of lead merchant bankers to verify the ability of underwriters.