by The Securities and Exchange Board of India (SEBI) has established guidelines on commission rates and responsibilities for underwriters to ensure transparency, protect investor interests, and maintain stability in the capital markets. These regulations help prevent malpractice and ensure that securities are fairly priced and efficiently managed.
SEBI Guidelines on Underwriting Commission Rates:
SEBI has set specific limits on underwriting commissions to ensure fairness and prevent excessive fees from burdening issuers. The commission rates depend on the type of securities being issued.
a) Equity Issues
For equity shares and convertible securities, SEBI regulates commission rates to ensure affordability for issuers while compensating underwriters adequately. The underwriting commission is typically capped at a reasonable percentage of the total issue amount, with variations based on the nature of the issue. SEBI ensures that the commission remains competitive while avoiding exploitation by underwriters.
b) Debt Securities
Underwriting commissions for debt instruments, such as debentures and bonds, are also regulated by SEBI. The rates are generally lower than those for equity securities due to the lower risk associated with fixed-income instruments. The commission structure may vary based on market conditions, credit ratings, and the tenure of the securities.
c) Public vs. Private Placement
-
In public offerings, the underwriting commission is tightly regulated to protect investor interests.
-
For private placements, commissions are more flexible, allowing issuers and underwriters to negotiate terms.
d) SEBI’s Role in Commission Regulation
SEBI periodically reviews underwriting commission rates based on market dynamics. Any changes to the commission structure are made to promote capital market efficiency and prevent unethical practices.
Responsibilities of Underwriters Under SEBI Guidelines:
-
Conducting Due Diligence
Underwriters are responsible for conducting thorough financial and legal due diligence before underwriting an issue. They must verify the issuer’s financial statements, assess business risks, and ensure regulatory compliance. SEBI mandates that underwriters review all relevant documents to avoid misleading investors.
-
Ensuring Fair Pricing of Securities
Underwriters play a critical role in pricing securities. SEBI requires underwriters to use fair valuation methods, ensuring that securities are neither overpriced nor underpriced. They must consider market demand, company performance, and industry benchmarks while setting prices.
-
Compliance with Disclosure Requirements
SEBI mandates that underwriters ensure full and fair disclosure in the prospectus. All material facts, including financial performance, business risks, and management details, must be accurately presented. Any misrepresentation can lead to penalties and legal action against the underwriters.
-
Managing Market Risks and Stability
Underwriters must take steps to stabilize the market, especially in cases of large public issues. SEBI requires them to manage risks effectively by subscribing to unsold securities, preventing price manipulation, and ensuring orderly trading.
-
Protecting Investor Interests
Investor protection is a key priority for SEBI. Underwriters must ensure that securities are issued in a manner that promotes investor confidence. This includes preventing fraudulent activities, avoiding conflicts of interest, and ensuring transparency in dealings.
-
Adhering to SEBI Regulations
Underwriters must strictly comply with SEBI’s guidelines regarding underwriting agreements, commission structures, and operational procedures. SEBI conducts periodic audits and reviews to ensure compliance. Any violation of the guidelines can result in penalties, license suspension, or disqualification.
-
Risk Management and Capital Adequacy
SEBI requires underwriters to maintain sufficient financial strength to cover their underwriting commitments. They must assess their risk exposure before entering into underwriting contracts, ensuring that they can absorb potential losses without disrupting market stability.
