Underwriting of Shares and Debentures.pdf

Underwriting of Shares and Debentures Underwriting Underwriting is the process through which an underwriter (usually a financial institution or investment bank) agrees to purchase any unsold shares or debentures from a company issuing new securities. This guarantees that t...

Underwriting of Shares and Debentures Underwriting Underwriting is the process through which an underwriter (usually a financial institution or investment bank) agrees to purchase any unsold shares or debentures from a company issuing new securities. This guarantees that the company will raise the desired amount of capital, even if not all securities are sold to the public. Underwriting Commission Advantages for Issuers 1. Guaranteed Capital Raising: ○ Meaning: Underwriting ensures the issuer will receive the intended capital regardless of market conditions. 2. Risk Mitigation: ○ Meaning: Underwriters absorb the risk of unsold securities, protecting the issuer from market volatility. 3. Expertise and Guidance:  ○ Meaning: Underwriters provide valuable market insights and ensure regulatory compliance, aiding in a smoother offering process. 4. Enhanced Credibility: ○ Meaning: Associating with reputable underwriters boosts the issuer’s credibility and attracts investors. Advantages for Investors 1. Access to New Issues: ○ Meaning: Investors gain early access to new investment opportunities through underwritten offerings. 2. Price Support: ○ Meaning: Underwriters may stabilize the security’s price post-issue, reducing price volatility for investors. 3. Due Diligence: ○ Meaning: Underwriters perform thorough vetting of issuers, providing investors with reliable information. 4. Informed Investment Decisions: ○ Meaning: Detailed prospectuses and financial disclosures from underwriters help investors make informed decisions. Advantages for Underwriters 1. Fee Income: ○ Meaning: Underwriters earn fees from underwriting spreads, management fees, and selling concessions. 2. Reputation and Market Position: ○ Meaning: Successful underwriting enhances the underwriter’s market reputation and attracts more business. 3. Strategic Opportunities: ○ Meaning: Underwriting builds relationships with issuers and opens doors to additional business opportunities. 4. Market Influence: ○ Meaning: Underwriters influence market pricing and stability, enhancing their role in financial markets. Marked Application Bear the stamp of an underwriter Benefit is given to particular underwriter in whose favor applications have been marked Unmarked Application Do not Bear the stamp of an underwriter Unmarked applications are received directly from the public. Benefit is given first to the company to the extent the issue is not underwritten by underwriters in case of partial undertaking. If there is surplus, then benefit of such unmarked applications is given to the underwriters. Types of Underwriting Normal Underwriting Definition: In normal underwriting, also commonly referred to as "best efforts" underwriting, the underwriter agrees to use their best efforts to sell as many of the securities as possible but does not guarantee the entire issue will be sold. The issuer receives proceeds from only the securities that are actually sold. Key Points: No Guarantee: The underwriter does not guarantee that all the securities will be sold. Risk: The issuer assumes the risk of any unsold securities. Fee Structure: The underwriter typically earns a commission based on the amount of securities sold. Firm Underwriting Definition: In firm underwriting (also known as "firm commitment" underwriting), the underwriter buys the entire issue of securities from the issuer at a set price and then resells them to the public. The underwriter assumes the risk of selling the securities and is guaranteed to receive the proceeds regardless of how many securities are eventually sold to investors. Key Points: Guaranteed Sale: The underwriter buys the full issue from the issuer, providing certainty that the issuer will receive the full amount of capital. Risk: The underwriter assumes the risk of selling the securities; if they can't sell all of them, they bear the loss. Fee Structure: The underwriter earns a spread or commission based on the difference between the purchase price and the selling price. In the books of Companies