SEBI and SEC Rules

for Investment
Bankers
Group 6
Varshil Doshi
Meghapriya
Aviral Juneja
Janhavi Kothari
Pradnya Wadia

Index
What is Underwriter?
SEBI Rules
SEC Rules
Examples on Rules Violation
Example on IPO failure
References

What is underwriting?
Underwriting is the process by whichinvestment bankersraise
investment capital from investors on behalf of corporations and
governments that are issuing eitherequityordebt securities.

Who can become an underwriter

Investment Banks or Syndicate of Investment Banks can become
the underwriters of an IPO.

Guidelines by SEBI for

underwriters
Eligibility criteria, Procedure for registration and operational
guidelines are covered under SEBI (Underwriters) Rules, 1993 .
The words underwriting and Underwriter are defined in the
rules as under:
"underwriting" means an agreement with or without conditions
to subscribe to the securities of a body corporate when the
existing shareholders of such body corporate or the public do not
subscribe to the securities offered to them.
"underwriter" means a person, who engages in the business of
underwriting of an issue of securities of a body corporate;

Compulsory Registraion
3. (1) No person shall act as underwriter unless he holds a certificate
granted by the Board under the regulations
Providedthat such person, who was engaged as underwriter prior
to the coming into force of the Act, may continue to carry on activity
as underwriter if he has made an application for such registration
under the proviso to sub-section (1) of Section 12 of the Act till the
disposal of such application

Conditions for grant or renewal

of certificate to
underwriter(Regulation 4)

In case of any change in the status and constitution, the underwriter

shall obtain prior permission of the Board to continue to act as
underwriter;

Without prejudice to the obligations under any other, the

underwriter shall enter into a valid agreement with the body
corporate on whose behalf he is acting as underwriter and the said
agreement amongst other things may define the allocation of duties
and responsibilities between him and such body corporate and;

He shall pay the amount of fees of registration in the manner

provided in the regulations;

He shall abide by the rules and regulations made under the Act in
respect of the activities carried on by him as an underwriter.

Eligibility Criteria(Regulation 6)

Has the necessary infrastructure like adequate office space,

equipments, and manpower to effectively discharge his activities;

Has any past experience in underwriting or has in his employment

minimum two persons who had the experience in underwriting;

Or any person, directly or indirectly connected with the applicant

has not been granted registration by the Board under the Act;

Fulfils the capital adequacy requirements specified in regulation

7;

Or any of its director, partner or principal officer is or has at any

time been convicted for any offence involving moral turpitude or
has been found guilty of any economic offence.

Period of validity
The certificate of registration or its renewal, as the case may be,
shall be valid for a period of three years from the date of its issue to
the underwriter.

Capital Adequacy(Regulation 7)
The capital adequacy requirement referred to in sub- regulation (d)
of regulation 6 shall not be less than the networth of rupees twenty
lakhs;

Agreements with
Client(Regulation14)
The period for which the agreement shall be in force;
The amount of underwriting obligations;
The period, within which the underwriter has to subscribe to the
issue after being intimated by or on behalf of such body corporate;
The amount of commission or brokerage payable to the underwriter;
Details of arrangements, if any, made by the underwriter for
fulfilling the underwriting obligations.

Responsibilities of
Underwriter(Regulation 15)
The underwriter shall not derive any direct or indirect benefit from
underwriting the issue other than the commission or brokerage
payable under an agreement for underwriting.
Every underwriter, in the event of being called upon to subscribe for
securities of a body corporate pursuant to an agreement referred to
in clause (b) of rule 4 shall subscribe to such securities within 45
days of the receipt of such intimation from such body corporate.

Subject to the provisions of any other law, every

underwriter shall keep and maintain the following
books of accounts and documents, namely : (a) in relation to underwriter being a body
corporate
(i) a copy of the balance sheet and profit and loss account.
(ii) a copy of the auditor's report.

(b) in relation to an underwriter not being a

body corporate
(i) records in respect of all sums of money received and
expended by them and the matters in respect of which the
and expenditure take place; and
(ii) their assets and liabilities.

receipt

Liability for action in case of

default(Regulation 25)
(1) An underwriter or a stock broker or a merchant banker
entitled to carry on business of underwriting without obtaining a
separate certificate under rule 3 who, (a) fails to comply with any conditions subject to which
certificate has been granted;
(b) contravenes any of the provisions of the Act, rules or
regulations; shall be liable to any of the penalties specified in
sub- regulation (2).
(2) The penalties referred to in sub-regulation (1) may be either:
(a) suspension of registration1*[under the grounds specified]
in sub-regulation (1) of Regulation 26 after enquiry for a
specified period; or
(b) cancellation of registration2*[under the grounds specified]
in sub-regulation (2) of Regulation 26.

SEC Regulations

SEC defines Underwriting and regulation

under Securities Act of 1993 & Securities
Exchange Act 1934

Equity Issue Management

Due

Diligence- Due Diligence- As part of the due diligence process, lawyers

for the underwriters and the issuer usually prepare letters stating that, based
on specific inquiries (and subject to exclusions for financial and other
information provided by experts), they are unaware of anything that may
indicate that the prospectus contains any material misstatement or omission
(Rule 10b-5, Exchange Act)

Prospectus

Delivery-The managing underwriter provides both preliminary

and final prospectuses to the broker-dealers participating in the distribution.
Marketing

the Issue- It is crucial to understand that the issuer and the

underwriting syndicatecannot sellsecurities, solicit requests for orders or send
out any research report or any report that discusses the company's future sales
and earnings during the period between the filing date and theeffective date.
(section 5 of the Securities Act ,1933)

Liabilities

Liability arises primarily under sections 11, 12 and 15 of the

Securities Act, and section 10(b) and Rule 10b-5 under the
Exchange Act, as follows:
1933

Securities Act
Any person who willfully violates the Securities Act of 1933 or
SEC rules and regulations is subject to five years in prison, a
$10,000 fine, or both.
Securities

Exchange Act , 1934

Section 10(b) and Rule 10b-5 liability.It is unlawful for any person
to do any of the following in connection with the purchase or sale
of any security:
-employ any fraudulent scheme;
-make any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which they were made, not misleading;
-engage in fraud or deceit.

Debt Issue Management

Due

Diligence
Registered offerings (same as equity)
Unregistered offerings (section 4(a)(2), Rule 144A and section 3(a)(2),
Exchange Act) - A private placement memorandum, offering circular or
offering memorandum is used. Second, the investment banks underwriting
unregistered offerings sign a purchase agreement with the issuer, rather than
an underwriting agreement. Third, issuers and underwriters often also use
term sheets to describe the terms of the offered securities, but these term
sheets are not filed with the SEC.
Prospectus

Delivery
Registered offerings (same as equity)
Unregistered offerings- No statutory prospectus required
Marketing
Liabilities

the Issue- (same as equity)

- (same as equity for registered and unregistered securities)

Underwriting

Types of Underwriting

Firm Commitment Underwriting

Underwriter purchases all the securities at a discount and then sell the securities to the
public at a fixed public offering price.
Competitive offering
Negotiated offering

Best Efforts Underwritings

Underwriter agrees to use its best efforts to sell the issuers securities, but does not
guarantee that all the shares will be sold.
Underwriter is not financially responsible for the securities it doesnt sell.
30 and 90 days period to completely sell else the offer stands cancelled.
The commitment can be of the nature
all-or-none (AON) commitment
mini-max aka part-or-none commitment.

Underwriting (contd.)
In most firm commitment equity offerings, the issuer grants the underwriters an option to
purchase up to an additional 15% of the number of offered securities to cover over-allotments.
The underwriting fee for firm commitment IPOs ranges from 5% to 7% of the gross proceeds.
The range for subsequent firm commitment offerings is somewhat lower. Underwriting fees for
best efforts offerings are variable, ranging from 3% to 8%.

Lock-up

Agreement
The underwriting agreement usually specifies a lock-up period (typically 180 days for IPOs and
45 to 90 days for subsequent offerings)during which the issuer and its directors, officers and,
for IPOs, most shareholders, agree not to sell securities of the same class as the offered
securities, subject to certain negotiated exceptions.
Closing conditions

The underwriters are only obliged to purchase the securities if the underwriters receive a
"bring-down comfort" letter from the auditor and legal opinions from the issuer's and
underwriters' lawyers.

Underwriting agreements also usually limit the underwriters' obligation to purchase the
securities if a material adverse change in the issuer's business occurs after the underwriting
agreement is signed but before the offering closes.

References
http://www.sebi.gov.in/acts/act161.html
http://
www.investopedia.com/terms/u/underwriting
.asp
http://us.practicallaw.com/