Introduction to Underwriting

Introduction to UnderwritingINTRODUCTION TO UNDERWRITINGUnderwriting is an agreement, ente rosy-cheeked into by a caller-up with a monetary agency, in order to ensure that the public will subscribe for the entire take of shargons or debentures made by the company. The financial agency is known as the under(a)writer and it agrees to buy that part of the company issues which are non subscribed to by the public in consideration of a specified underwriting commission. The underwriting agreement, among other(a)s, must(prenominal) provide for the geological period during which the agreement is in force, the centre of underwriting obligations, the period within which the underwriter has to subscribe to the issue after be intimated by the issuer, the amount of commission and details of arrangements, if any, made by the underwriter for fulfilling the underwriting obligations. The underwriting commission may not exceed 5 percent on touchs and 2.5 percent in case of debentures.Unde rwriting has become very alpha in recent old age with the growth of the corporate sector. It provides several BENEFITS to a company-It relieves the company of the explore and uncertain(p)ty of marketing the securities.Underwriters hand over an intimate and specialized knowledge of the capital market. They advance valuable advice to the subject company in the expression of the prospectus, time of floatation and the price of securities, etc. They likewise provide advancement service to the companies which have entered into underwriting agreements with them.It helps in financing of new enterprises and in the expansion of the existing projects.It builds up investors self-reliance in the issue of securities.The issuing company is assured of the avail susceptibility of funds. Important projects are not hold up for want of funds.It facilitates the geographical dispersal of securities because generally, the underwriters maintain cont puzzle outs with investors throughout the cou ntry.TYPES OF UNDERWRITINGSyndicate Underwriting is one in which, two or more agencies or underwriters correlatively underwrite an issue of securities. Such an arrangement is entered into when the total issue is beyond the resources of one underwriter or when he does not want to block up large amount of funds in one issue.Sub-Underwriting- is one in which an underwriter films a part of the issue throw out underwritten by another agency. This is done to diffuse the risk involved in underwriting.Firm Underwriting is one in which the underwriters applyfor a block of securities. Under it, the underwriters agree to take up and pay for this block of securities as unremarkable subscribers in addition to their commitment as underwriters.UNDERWRITERSTo act as an underwriter, a certificate of fitting must be obtained fromSecurities and Exchange Board of India (SEBI). The certificate is granted by SEBI under the Securities and Exchanges Board of India (Underwriters) Regulations, 1993. T hese regulations deal in the first place with issues such as registration, capital adequacy, obligation and responsibilities of the underwriters. Under it, an underwriter is required to enter into a legitimate agreement with the issuer entity and the said agreement among other things should define the allocation of duties and responsibilities between him and the issuer entity. These regulations have been further revise by theSecurities and Exchange Board of India (Underwriters) (Amendment) Regulations, 2006.ROLE OF UNDERWRITERSThe primary role of the underwriter is to purchase securities from the issuer and resell them to investors.Underwriters act as in enclosureediaries between issuers and investors, providing for an efficient of capital.The underwriters take the risk that it will be able to resell the securities at a profit.Perhaps the intimately visible and familiar element of the initial public offering solve is the underwriter. The underwriter is the organization that is actually responsible for pricing, selling, and organizing the issue, and it may or may not provide spare service. With direct public offerings, there is no need for an underwriter.Selection of a good underwriter is of the finish importance, but its important to understand that many underwriters are equally selective of their clients. Because an underwriters reputation depends on fortunate issues, few firms will be willing to stake their reputation on questionable companies.When selecting an underwriter, its important to seek out an established company with a good reputation and quality research coverage in your field. The decision may also depend on the kind of agreement the underwriter is willing to cultivate regarding the sale of shares. For profitable and established private companies, it shouldnt be difficult to locate an underwriter willing to scarper on a firm commitment arrangement. Under such an agreement, the underwriter agrees to buy all issues shares, regardless of a bility to sell them at a particular price.For riskier or less established companies, an underwriter may offer best efforts arrangement for the initial public offering. A best efforts contract requires the underwriter to buy all enough shares to fill investor demand. Under this arrangement, the underwriter accepts no responsibility for unsold shares.Aside from fees and sales arrangements, most underwriters are fairly similar in their roles. An underwriter will assist in the preparation and patience of all appropriate second base filings, helping potential investors defend informed decisions about your offering. All underwriters are required to exercise due diligence in verifying the information they submit, so a certain amount of investigation should be expected from any responsible underwriter.In addition to SEC registration filings, the underwriter will create a preliminary prospectus that will become a major part of the issues marketing campaign. This document is also referre d to as the red herring, after a pocket-sized red passage in the document that states that the company is not attempting to sell shares prior to SEC approval.Once SEC approval is obtained, the underwriter and the corporation will embark on a road show to approximate and attract interest from investors. While the road show does not involve getting binding commitments from investors, it helps the underwriter determine the best strategies for pricing and issuance.After the initial public offering, the underwriter continues to provide services for the impudently public corporation. For months or even years after the offering, the underwriter may continue to make a market for the stock, ensuring liquidity for investors and making the shares more desirable. Twenty-five days after the issue, the underwriter is also permitted to make statements or projections regarding the company and its prospects.ANALYSIS OF RESEARCH ARTICLESARTICLE 1ROLE OF UNDERWRITER IN initial PUBLIC OFFERING (IPO) When a company wants to raise funds throughinitial public offering (IPO)it appoints aninvestment bank for underwritingthe issue. AnInvestment bankis also called asmerchant bank. There is no regulatory restriction to use the services of amerchant bankfor IPO. Since in an IPO a company participates for the first time, it doesnt have complete understanding of the rules and livelihood, required to be submitted, to get a clearance from the regulator. famed merchant bankers world over are Goldman Sachs, Credit Suisse and Morgan Stanley. Banks like Deutsche, Citi, UBS etc have investment banking wings. Underwriters assess and meditate firms current performance, firms future earnings potential, industry scenario, competition in the same sector, current local and world(a) market situations etc. to decidethe issueprice/price band. They also work on the activities like completion of the mandatory documentation as required by the regulatory body. Underwriters charge a fee for this activity, w hich is generally a luck ofthe issuesize.If the issue size is very large a syndicate of merchant banks takes up the task of underwritingthe issue. stock-still onemerchant bankleads the other.merchant confideERSThe merchant bankers are those financial intermediaries involved with the activity of changering capital funds to those borrowers who interested in borrowing.They guarantee the success of issues by underwriting them.merchant banks are popularly known as issuing and pass judgment houses.Unlike in the past, their activities are now primarily non-fund based (fee based).They offer a package of financial services. The basic function of merchant banks is marketing corporate and other services that are guaranteeing sales and diffusion of securities and also other activities such as steering of customer services, portfolio management of customer services, portfolio management, credit syndication, betrothal credit, counseling, insurance, etc.As per SEBI (Merchant bankers) Rules , 1992Merchant bankers means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as charabanc, consultant, interpret or rendering corporate advisory service in relation to such issue management. merchandiser BANKINGMerchant banking activity was formally initiated into the Indian capital markets when grind lays bank received the license from admit bank in 1967.grindlays started with management of capital issues ,recognized the needs of emerging class of entrepreneurs for diverse financial services ranging from production planning and system design to market research .even it provides management consulting services to meet the requirements of small and medium sector rather than large sector. Citibank setup its merchant banking division in1970.the various tasks performed by this divisions that is to say assisting new entrepreneur ,evaluating new projects ,raising funds through b orrowing and issuing equity. Indians banks started banking services as a part multiple services they offer to their clients from 1972.state bank of India started the merchant banking division in 1972.in the initial years the SBIS objective was to render corporate advice and assistance to small and medium entrepreneurs.REGISTRATION OF MERCHANT BANKERS WITH SEBIIt is mandatory for a merchant banker to register with the sebi. Without holding a certificate of registration granted by the securities and exchange circuit card of India, no person can act as a merchant banker in India.Only a body corporate other then a non-banking financial company shall be eligible to get registration as merchant banker.The applicant should not carry on any business other than those connected with the securities market.All applicants for merchant bankers should have qualifications in finance, law or business management.The applicant should have infrastructure like office space, equipment, manpower etc.The applicant must have at least(prenominal) two employees with prior experience in merchant banking.MERCHANT BANKERS IN INDIAThere are cxxxv merchant bankers who are registered with sebi now in India. There are public sector, private sector and external players registered with sebi. The below are the examples of few of the merchant bankers in each of the public, private and foreign players.PUBLIC vault of heaven MERCHANT BANKERSSEBI CAPITAL MERKETS LTD.PUNJAB NATIONAL BANK.IFCI FINANCIAL SERVICES LTD.KARUR VYSYA BANK LTD.STATE BANK OF BIKANER AND JAIPUR.PRIVATE SECTORS MERCHANT BANKERSICICI SECURITIES LTD.AXIS BANK LTD(FORMERLY UTI BANK LTD.)BAJAJ CAPITAL MARKETS LTDTATA CAPITAL MARKETS LTD.ICICI BANK LTD.RELIANCE SECURITIES LIMITED.KOTA MAHINDRA CAPITAL COMPANY LTD.YES BANK LTD.FOREGN PLAYERS IN MERCHNT BANKING.GOLDMAN SACHS(INDIA)SECURITIES PVT.LTD.BARCLAYS SECURITIES(INDIA)PVT.LTD.BANK OF AMERICA.N.A.DEUTSCHE BANK.DEUTCHE EQUITIES INDIA PRIVATE LIMITED.SERVICES OF MERCHANT BANKSP ROJECT COUNSELLINGProject counseling includes preparation of project reports,deciding upon the financing pattern to finance the cost of the project and appraising the project report with the financial institutions or banks.it also includes filling up of application forms with relevant information for obtaining funds from financial institutions and obtaining organization approval. circumspection OF DEBT AND EQUITY OFFERINGSThis forms the main function of the merchant banker.he assists the companies in raising funds from the market.the main areas of work in this regard include instrument designing, pricing the issue, registration of the offer document, underwriting support and marketing of the issue, allotment and refund, listing on stock exchanges.ISSUE MANAGEMENTManagement of issue involves marketing of corporate securities namely equity shares, preference shares and debentures or bonds by offering them to public. Merchant banks act as per SEBI guidelines, the merchant banker arra nges a meeting with company representatives and advertising agents to finalize arrangements relating to date of opening and closing of issue, registration of prospectus, launching advancement campaign and fixing date of board meeting to approve and sign prospectus and pass the required resolutions. Pricing of issues is done by the companies in consultant with the merchant bankers.MANAGERS, CONSULTANATS AND ADVISERS OF THE ISSUEThe managers of the issue assist in the drafting of prospectus, application forms and completion of formalities under the companies act, appointment of registrar for dealing with share applications and transfer and listing of shares of the company on the stock exchange. Companies can appoint one or more agencies as managers to the issue.UNDERWRITING OF PUBLIC ISSUEUnderwriting is a guarantee given by the underwriter that in the event of under subscription, the amount underwritten would be subscribed by him. Merchant banking subsidiaries cannot underwrite mor e than 15% of any issue.PORTFOLIO MANAGEMENTPortfolio refers to investment in different kinds of securities such as shares, debentures or bonds issued by different companies and government securities. Portfolio management refers to maintaining proper combinations of securities in a manner that they give maximum return with minimum risk.RESTRUCTURING STRATEGIESAA merger is a combination of two companies into a single company where one survives and other losses its corporate existence. A takeover is the purchase by one company acquiring controlling interest in the share capital of another existing company. Merchant bankers are the middlemen in setting negotiation between the companies. Merchant bankers assist the management of the client company to successfully restructure various activities, which include mergers and acquisitions, management buyouts, joint ventures among others.OFFSHORE FINANCEThe merchant bankers help their clients in the following areas involving foreign currencyLo ng term foreign currency loansJoint ventures abroadFinancing exports and importsForeign collaboration arrangementsROLE OF MERCHANT BANKER IN A PRIMARY MARKET ISSUE MANAGEMENTMerchant banker is the intermediary appointed by companies in the primary market issue. It has to look at the entire issue management and work as the manager to the public issue.Referenceshttp//lastbull.com/iporole-of-underwriter/