SEBI regulations regarding underwriting

08/10/2022 1 By indiafreenotes

The nature and form of underwriting transactions depend mainly upon the nature of the project, the state of the capital market, the general response of the investors to the new issues, the reputation of the promoters and capacity of the underwriters. It may be undertaken on a commission basis.

An issuing company may get underwriting from a single underwriter but where the size of the issue is so large that it is unmanageable by a single underwriter and the risk involved is also high, the company may approach a number of underwriters.

SEBI’s Guidelines for Underwriting

According to SEBI, the number of underwriters should be decided well in advance by the issuer and he must obtain prior permission from SEBI. Permission will be granted by SEBI only after finding out the net worth of the underwriters and their outstanding commitments.

The Stock Exchange, where the security is going to be listed must also be informed about the arrangements made with the underwriters.

25% of each class of securities must be offered to the public and in the remaining 75%, the following method of firm allotment could be adopted.

SEBI has instructed companies to allot to three major categories of allotees, namely,

  • QIB
  • HNI
  • Retailers

QIB refers to qualified institutional bidders ( Mutual Funds, banks, etc.).

HNI refers to high net worth individuals, investing more than Rs. 1 lakh in a single company security.

Retailers are individuals who are investing less than Rs. one lakh.

Types of Underwriters

There are two types of underwriters. They are

  • Institutional underwriters: IDBI, IFCI, UTI, SBI Capital Market
  • Non-Institutional underwriters: Any NBFC.

Institutional underwriting in India helps companies to raise capital in their early stages. In fact, many companies which may not come to the notice of the public were promoted due to the support given by institutional underwriters.

Many institutional underwriters were responsible for the promotion of infrastructure companies in the area of steel, chemicals, fertilizer, etc.

Responsibilities of Underwriters

  1. An underwriter not only has to underwrite the securities but has to subscribe within 45 days that part of shares which remain unsubscribed by the public.
  2. His underwriting obligations should not exceed, at any time, 20 times of his net worth.
  3. The underwriter cannot derive any other benefit except the underwriting commission which is 5% for shares and 2½% for debentures.

Merits of Underwriting

  1. Underwriting ensures success of the proposed issue of shares since it provides an insurance against the risk.
  2. Underwriting enables a company to get the required minimum subscription. Even if the public fail to subscribe, the underwriters will fulfill their commitments.
  3. The reputation of the underwriter acts as a confidence to investors. The underwriters who are called the lead managers provide financial recognition to the company, whose shares are issued to the public. Thus, the reputation of the issuing company also improves because of the reputation of underwriters.