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What is Underwriting of Shares

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Underwriting of Shares:

What is underwriting?

A public company is required to sell a minimum number of shares (called minimum subscription) before getting a certificate of commencement of business. To secure the minimum subscription during the prescribed period. The company may enter into the agreement with some sound party. in case the required shares are not subscribed within the specified, then the contracting party ensures the sale of shares is known as underwriting of shares.

“underwriting may be defined” as a contract made by the promoters with persons like brokers, or institutions like banks, insurance companies ,syndicates or security dealers who are willing to take the while or portion of such of the offered as may not be subscribed for by the public. The underwriters make the payment of subscribed shares in full to the company and sell them later on to the general public.

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As the risk of the share is transferred to the underwriters, they therefore, take the underwriting commission as agreed between the parties and also authorized by the articles. If the offered shares to be underwritten are of small amount, they are generally taken up by individuals, brokers, banks and insurance companies. If the offered shares involve huge amount, the underwriting syndicate are formed to share the risk.

Importance of underwriting of shares;

  1. The underwriter stand guarantee and help the promoters in undertaking the risk of starting or enlarging a project.
  2. When the issue is underwritten, the company is assured of the required capital.
  3. The company gets the benefit of specialized knowledge of the underwriters in the marketing of securities.
  4. If the underwriters are men of integrity , it raises the status of the company
  5. If the securities are sold in the market, the underwriting syndicate can also be dissolved.

Types of Underwriting of shares:

  1. Open Underwriting

Open underwriting is also called Conditional Underwriting. Under this type , the underwriter agrees to take up shares only when the issue is not subscribed by the public in full.

  1. Firm Underwriting

When an underwriter agrees to buy a certain number of shares in addition to the shares he has to take under the underwriting agreement, it is called firm underwriting.
Even if the issue is oversubscribed, underwriters are responsible to take up the agreed number of shares in case of firm underwriting.

Marked Application

Generally shares of a company are underwritten by two or more underwriters in an agreed ratio. Generally the forms are stamped with the name of the underwriters in order to differentiate the forms of one underwriter from that of others. Such stamped applications when received are called marked applications.

Unmarked Application

The application forms which are received by the company without any name of the underwriter are called unmarked applications.