Chapter:- V - Underwriting of Securities

Q1) What is underwriting? Ans) Underwriting is a guarantee given by the underwriters to take up whole or part of the issue of securities not subscribed by the public. It is a marketing technique whereby corporate enterprises are able to sell there securities to the public and thereby achieve success in the public issue. Q2) What are the types of underwriters? Ans) 1. 2. 3. 4. Firm underwriting . Sub-underwriting. Joint underwriting. Syndicate underwriting

Q3) What are the benefits/functions of underwriting? Ans) Adequate funds is guaranteed to the issuer of securities. 2. Expert advise is provided by underwriter 3. Enhanced goodwill 4. Assurance to investors. 5. Better marketing. 6. Price stability. 7. Benefits to buyers of securities. Q4) Who are the underwriting agencies? Ans) 1. 2. 3. 4. Private agencies. Investment companies Commercial banks Development financial institutions

Q5) What are the obstacles faced by underwriting firms in India? Ans) 1. 2. 3. 4. 5. 6. Chaotic capital market Slow industrialization Managing agencies system (since abolished) Bashful investors Lack of specialized institutions. Unsuccessful corporate.

Q6) Who is underwriter? Ans) The financial services intermediary who arranges for the subscription of the issue of securities in the event of the issue not being taken up by the public or who firmly guarantees a capital issue is called the underwriter. What are the guidelines issued by SEBI with regard to underwriting business in India?

Q7)

Ans)1. Underwriting has been made optional to the issuer since October 1994. However, in case of not underwritten issue of equity shares if issuer is not able to collect 90% of the amount to the public the amount collected is required to be refund to the investors however this condition is not applicable to the debt issue. 2. Number of underwriters will be decided by the lead manager to the issue and will be disclosed to SEBI and the under writing agreement to be filed with the Stock Exchange. 3. Underwriter should get registered with SEBI and his minimum net worth should be Rs. 20 lakhs. 3. Obligations and responsibilities should be complied with strictly by underwriter and its outstanding underwriting obligations should not exceed 20 times the underwriters net worth at any Point of time. 4. Underwriters is entitled for underwriting commission for the services which depend on the obligation devolving on the underwriters. Underwriting commission should be paid within 15 days of finalization of allotment and no underwriting commission payable on the amount taken by promoter, employees, director and their friends and business associates. Q8) What is Offer for sale? What are its features? Ans) Offer for sale taken place when a company arranges to obtain money from private sources by making the issue of securities fully to them. The private sources include issue houses, merchant bankers, high net worth individuals etc. Issue is generally made at higher price than it is offered to the private parties. Q9) What are Bought-out Deals (BODs)? advantages? What are its

Ans)

BOD is an arrangement whereby the entire equity or related security is bought in full or in lots with the intension of off loading it latter in the market is called Bought-out Deal. The features of the BODs are as follows:

1. One arrangement between Merchant banker and the issuer company till they are issued to the public. 2. No retailing and they are cheapest and quickest source mode of finance for small and medium companies. 3. It is fund based activity for merchant based activities for merchant bankers. 4. It is wholesale activity 5. Reserved portion to the reserved category of institutions. The advantages of BODs are as follows: 1. Efficient appraisal of the project by merchant bankers before investment of funds. 2. Proper avenue to price the securities of the companies. 3. Public issue cost is saved because fund is raised upfront. 4. Helpful to the entrepreneurs who are not confident enough of taping the capital market directly. 5. there is assurance and safety to the investors as project is already appraised by the merchant bankers. 6. Handsome profit for the merchant banker if proper issue and prices are selected. Q10) What is meant by Private Placement? features? Ans) What are its

The direct sale of securities by a company to institutional investors is called private placement. It is another variant of underwriting. Private placement assumes that the offerees are limited and few and have sufficient knowledge and experience to evaluate the merits and risk of investment.

The features of the Private Placement are as follows: 1. No prospectus is to be issued. 2. Private placements covers the instrument like preference shares and debentures. 3. Issuer could be public ltd company or private ltd company. 4. Investors are mainly big institutional investors namely UTI, LIC, GIC, SFC, Pension and insurance funds etc. 5. Intermediaries are credit rating agencies, merchant banks etc.

6. Negotiation will be effective because of limited number of participants. 7. Non-convertible debenture is popular instrument in private placement market. 8. The market size of the private placement is big similar to the market for public issue. The advantages of private placement are as follows: 1. 2. 3. 4. Popular mode Quick Access Secrecy. Influence

Q11) What is Grey market? Ans) When securities are not sold through prospectus it is a case of Grey market placement. In the Grey market trading takes place in securities much before official listing. The modest operandi in Grey market is soliciting through post of print media or door-to door. The interested parties to purchase shares in a private placement. The Grey market exists with the active connivance of the promoters. Promoters sell shares out of their quota and profit from any premium collected.