Shares and Debentures Underwriting & Underwriting Forms
UNDERWRITING OF SHARES AND DEBENTURES
Underwriting is a company’s guarantee for the sale of a minimum number of shares or debentures issued by a Public Limited company.
When a company makes an Initial Public Offering (IPO), it can be unclear whether or not the sale of stock or debentures would be fully subscribed. According to SEBI guidelines, if the company is unable to collect 90% of the bid number, it must compulsorily refund the money to those who have subscribed to shares or debentures, resulting in a significant waste of issue expenses. Underwriters, a specialist community of risk redeemers, could help to eliminate this ambiguity.
Intercompany Accounts and Audits (CMA) Underwriters may be companies or individuals that specialize in underwriting.
The fee paid to underwriters for underwriting is known as underwriting commission. It could be paid in cash, fully paid up shares, debentures, or a combination of the three. Unless otherwise stated, it is based on the issue price.
In other terms, it is an arrangement in which the underwriters guarantee the company that if the public shares and debentures sold to the public are not fully subscribed, the underwriters will take up the remaining shares and debentures.
The following are some of the benefits of underwriting:
- The corporation is certain to receive the full value of any issued shares or debentures.
- It increases the company’s goodwill.
- It makes it easier to distribute securities widely.
- Underwriters provide professional advice to the corporation when it comes to selling securities.
- It meets the minimum subscription requirement.
Provisions regarding Underwriting
A business cannot pay a fee on the issuance of shares or debentures unless its Articles specifically allow it.
In the case of bonds, the commission is limited to 5% of the issue price, and in the case of debentures, it is limited to 2.5 percent. SEBI, on the other hand, has limited underwriting commissions to 2.5 percent of the issue price of equity securities.
The commission sum or rate should be reported in the prospectus.
The directors must claim in the prospectus that the underwriters are capable of fulfilling their underwriting contract obligations.
Read more about Underwriting of Shares and Debentures & Types of Underwriting here!
