Types of Underwriting

11/07/2020 1 By indiafreenotes

An agreement to undertake the shares or debentures of a company are of the following types:

(a) Complete Underwriting:

In case, the entire issue of shares or debentures of a company is undertaken, it is said to be full or complete underwriting. Such an underwriting may be done by one underwriter or by a number of underwriters. If the full issue is underwritten by one underwriter, then his liability will be equal to the number of shares or debentures underwritten minus shares applied for.

Even if the issue is fully as subscribed or over-subscribed, the underwriter is eligible to get the agreed commission on the issue of shares. In case less number of shares or debentures are subscribed by the public, the underwriter is required to meet the deficiency in whole. In case, the public response is good, the underwriter is at an advantage to get the underwriting commission, without subscribing even a single share of debenture.

At the same time, if there are more than one underwriter, then allocation of unsubscribed shares or debentures amongst themselves is made pro-rata, that is, in the ratio in which the number of shares or debentures underwritten bear to the total number of shares or debentures offered for subscription.

(b) Partial Underwriting:

If a part of the issue of shares or debenture of a company is underwritten, it is said to be partial underwriting. Such an underwriting may be done by one underwriter or by a number of underwriters. In case of partial underwriting, the company is treated as ‘underwriter’ for the remaining part of the issue. For instance, a company issued 1,000 shares and 40% thereof is underwritten by Nikhil. Out of 800 applications received, the marked applications are 350.

The liability of Nikhil is calculated as under:

Gross liability of Nikhil = 40% of 1,000 shares = 400

Less: Marked Applications = 350

Net liability of Nikhil = 50

It is to be noted that in case of partial underwriting, the underwriter does not get credit against the unmarked applications.

(c) Firm Underwriting:

It is an underwriting agreement where the underwriter or underwriters agree to buy a certain number of shares or debentures irrespective of the number of shares or debentures subscribed by the public. Thus, in firm underwriting, the underwriters agree that a certain number of shares be allotted to them, whether or not the issue is over subscribed.

An underwriting agreement may be open or firm. An agreement to take up shares or debentures only when the issue is not subscribed in full is called open underwriting. For instance, if an underwriter guarantees the issue of 1,00,000 shares and the public applied for 70,000 shares, then the underwriter has to purchase the balance of 30,000 shares which are unsubscribed; in case, the public applied for 80,000 shares, then the underwriter has to purchase the balance of 20,000 unsubscribed shares; in case the public applied for 90,000 shares, then the underwriter has to purchase the balance i.e., 10,000 shares and in case the public applied for 1,00,000 or more shares, the underwriter has no liability against the shares. Again, in case of under-subscription, the underwriter is asked to purchase the deficiency of agreed shares, under open underwriting.

When an underwriter, enters into an agreement with the Company, to purchase certain number of shares or debentures, irrespective of the public subscription, in addition to the open writing, is known as firm underwriting. Thus, under firm underwriting, the underwriter agrees to take a specified number of shares or debentures, in addition to the unsubscribed shares or debentures. An underwriter through such an agreement with the Company gets priority over the public in relation to the allotment, in case of over-subscription.

(D) Firm applications are generally treated as direct applications from the public and are included therein. If, however, the agreement specifically provides, personal relief is given for firm applications also along-with the marked applications. Firm applications are added to the net liability to find out the ultimate liability of an underwriter.

(E) Syndicate Underwriting:

When the issue is very big and it is impossible to be underwritten by a single underwriter syndicate underwriting comes to rescue. In syndicate underwriting, few underwriting firms form a syndicate and jointly undertake to underwrite the issue. The amount to be underwritten and the ratio is determined in advance among the firms. For example, For an issue of 10,000 6 underwriters may form a syndicate and underwrite in the ratio of  30:20:20:10:10:10.

(F) Joint Underwriting:

In Joint underwriting, when the issue is too large, the issuer company itself appoint more than one underwriter to reduce the burden from a single underwriter. Each Underwriter underwrites for a specified amount and in a specified ratio. It is different from a syndicate underwriting in a way that in Syndicate underwriting the underwriting firm themselves form a syndicate and represent themselves as single underwriting firm but in joint underwriting, the issuer company itself appoint a number of firms to underwrite the issue.

(G) Sub-underwriting:

If an underwriter has promised to underwrite an issue and later on it feels that it is beyond his individual capacity, then he may appoint a sub-underwriter to safeguard himself. For example, if an underwriter A has underwritten for an amount of 40 crores, and later on he finds it difficult to underwrite single Handadley he may appoint a sub-underwriter to underwrite 10 crores. In this case, the sub-underwriter is liable to underwriter only and he has no connection with the company. The relationship between underwriter and sub-underwriter is same as an agent and sub-agent.

Abatement Clause

A contractual provision releasing the tenant of a lease from the obligation to pay rent when an act of God prevents the occupancy of the premises.

Ex

Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee’s use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.

Abatement. In the event a material portion of the Premises is damaged as a result of a fire or other casualty, the Base Rent shall abate for the portion of the Premises that is damaged and not usable by Tenant until substantial completion of the repairs and restoration required to be made by Landlord pursuant to Section 16.A. Tenant, however, shall not be entitled to such abatement if the fire or other casualty was caused by the negligence or intentional misconduct of any of the Tenant Parties. Landlord shall not be liable for any loss or damage to Tenant’s Property or to the business of Tenant resulting in any way from the fire or other casualty or from the repair and restoration of the damage. Landlord and Tenant hereby waive the provisions of any Law relating to the matters addressed in this Article, and agree that their respective rights for damage to or destruction of the Premises shall be those specifically provided in this Lease.

Abatement. If Landlord shall receive any tax refund or reimbursement of Taxes or sum in lieu thereof with respect to any Tax Year which is not due to vacancies in the Building, then out of any balance remaining thereof after deducting Landlord’s expenses reasonably incurred in obtaining such refund, Landlord shall, provided there does not then exist a Default of Tenant, credit an amount equal to such refund or reimbursement or sum in lieu thereof (exclusive of any interest) multiplied by the Escalation Factor against the obligations of Tenant next falling due under this Article VIII; provided, that in no event shall Tenant be entitled to receive a credit equal to more than the payments made by Tenant on account of Taxes for such Year pursuant to paragraph (b) of Section 8.1 or to receive any payments or abatements of Basic Rent if Taxes for any Tax Year are less than Base Taxes or if Base Taxes are abated.