Underwriting of

Securities

PRESENTATION

ON

Meaning and Definition

Krishna Life Style Pvt Ltd.

Company issue their IPO on November 2006-07

• The face value of Equity shares is Rs.10 each• Company issued share at premium• Last day of IPO company get per 100 share

0.59% share• Company appointed that time 3 underwriters

Purchaser of securities

• Morgan stainly 15%

• SBI capital 15%

• Kotak securities 5%

• Selling to their clients or market panters

The purpose of more than one underwriter underwriting the issue is;

1)To share the underwriting risk and 2)To create necessary confidence in the mind

of the investing public.

Fund can be collected by corporate sector by:

• Public issue• Rights issue• Private placement• Preferential allotment to employees.• Preferential allotment to suppliers and

dealers. • Preferential allotment to financial institutions

(IDBI, ICICI, IFCI, HDFC).• Underwriting of shares issue.

Methods of underwriting:

(1)Standing behind the offer. (2)Outright purchase method.(3)The syndicate method.

Importance of underwriting:

Advantages of underwriting

• Underwriting undertake to guarantee the whole or part of the issued shares as they would not be taken up by the public. Therefore the companies issuing securities are relieved from the tension of marketing of securities and of uncertainties in the market.

• Underwriters help the companies in fulfilling the statutory regulation of minimum subscription.

• Underwriters give guarantee to adequacy of capital and help companies in raising capital.

Cont...

• Investors believe in the issue of securities, if it is guaranteed by reputed underwriters.

• Underwriters assure a quick sale of securities in the market.

• An underwriter stimulates industrial development and creates more employment opportunities in the country.

Limitation of underwriting:

• Underwriting is very costly method of marketing of securities.

• Issuing company has to provide secret information about its affairs to the underwriters and misuse of such information is possible.

• Underwriter may secure control on the company by virtue of purchasing large number of shares not purchased by the investing class.

Underwriting agency in India:

(a)Stock brokers/ consortium of brokers.(b)Term lending institutions- IDBI, IFCI, IRBI,

SFC’s and SIDC’s.(c)Commercial banks – state bank of India, bank

of Baroda, Dena bank, etc.(d)Investment institutions- LIC, GIC and UTI.(e)Merchant banking institutions.

Defects of Indian underwriting system:

• Absence of systematic distribution machinery:

• Absence of underwriting facilities to small firms:

• Absence of special underwriting institution:

Minimum subscription clause:

Underwriting commission:

• An underwriter should have a minimum net worth of Rs. 20 lakes, and his total obligation at any time should not exceed 20 time the underwriter’s net worth.

Nature of issue On amount devolving on underwriters

On amounts subscribed by public

Equity shares, preference share and debentures

2.5% 2.5%

Issue amount up to Rs. 5 lakes

2.5% 1.5%

Issue amount exceeding Rs. 5 Lakes

2.0% 1.0%

Consolidated SEBI guidelines for disclosure and investor protection

Full underwriting made mandatory: SEBI has also made underwriting compulsory for the full issue. If the issuing company does not receive a minimum 90% of the public offer plus and the accepted devolvement from underwriters within 120 days from the date of opening of the issue, the company shall have to refund the entire amount of subscription. In case of the disputed devolvement, the company should refund the subscription if the above conditions are not met.Earlier SEBI had made underwriting compulsory for the full issue but recently underwriting has been made optional for the issuer companies.

Shroff committee recommendation in 1974:

Thank you