An underwriter is an entity who agrees to purchase securities that may not be purchased by the persons to whom such securities are offered. The agreement is called an ‘underwriting agreement’ and is entered into with the issuer of securities.
Need for Underwriting
- By law, an issuing company must ensure that at least 90% of capital issued to the public, including rights issues, is subscribed. In the event of failure to mobilize the minimum subscription, the funds collected are to be refunded to subscribers
- Project implementation risks are intrinsically linked to the success of securities issues
To mitigate these risks, issuing companies enter into underwriting arrangements.
Role of Underwriter
Underwriters are responsible for subscribing to the unsubscribed securities at the offer price. When the issue is not fully subscribed, the unsubscribed portion is said to ‘devolve’ upon the underwriter. In case of devolvement, the unsubscribed portion is subscribed by underwriters in proportion to their underwriting commitments. Underwriting commission is payable to the underwriters irrespective of whether or not the issue or any part thereof devolves.
Eligibility
A SEBI issued certificate of registration is mandatory for all underwriters with the exception of stock brokers and merchant bankers.
when an average investor thinks IPO, he assumes a full subscription.However, sometimes there is undersubscrption.The underwriters actually support the IPO to be carried out properly by purchasing those unsubscribed shares.This term is quite a business term and hence this article helps us understand the different aspect of issue of shares.