UNDERWRITING OF SHARES AND DEBENTURES
1. Need of Underwriter:-
When a company goes in for an initial public offer (IPO), it may face certain uncertainty particularly when a company is new, about whether its offer of shares or other securities will be subscribed in full or not. Here SEBI Guidelines create problem as per guidelines 14 (4) (b), it is required that if the company is not able to collect 90% of the offer amount, then it needs to compulsorily return the money to those who have subscribed to the shares.
This uncertainty could be avoided by the help of a specialised group (individual or a firm) of risk-redeemers — called Underwriters.
Underwriting is basically an agreement, with or without conditions, to subscribe to the securities of a company when public do not subscribe to the securities offered to them.
2. UNDERWRITING COMMISSION
The consideration payable to the underwriters for underwriting the issue of shares or debentures of a company is called underwriting commission. Such a commission is paid at a specified rate on the issue price of the whole of the shares or debentures underwritten whether or not the underwriters are called upon to take up any shares or debentures. Thus, the underwriters are paid for the risk they bear in the placing of shares before the public. Underwriting commission may be in addition to brokerage.
Payment of Underwriting Commission
Section 40 (6) of the Companies Act 2013, provides that a company may pay commission to any person in connection with the subscription or procurement of subscription to its securities, whether absolute or conditional, subject to the following conditions which are prescribed under Companies (Prospectus and Allotment of Securities) Rules, 2014:
(a) The payment of such commission shall be authorized in the company’s articles of association;
(b) The commission may be paid out of proceeds of the issue or the profit of the company or both;
(c) The rate of commission paid or agreed to be paid shall not exceed, in case of shares, five percent (5 %) of the price at which the shares are issued or a rate authorised by the articles, whichever is less, and in case of debentures, shall not exceed two and a half per cent (2.5 %) of the price at which the debentures are issued, or as specified in the company’s articles, whichever is less;
(d) The prospectus of the company shall disclose – the name of the underwriters; – the rate and amount of the commission payable to the underwriter; and – the number of securities which is to be underwritten or subscribed by the underwriter absolutely or conditionally.
(e) There shall not be paid commission to any underwriter on securities which are not offered to the public for subscription;
(f) A copy of the contract for the payment of commission is delivered to the Registrar at the time of delivery of the prospectus for registration. Thus, the Underwriting commission is limited to 5% of issue price in case of shares and 2.5% in case of debentures. The rates of commission given above are maximum rates. The company is free to negotiate lower rates with underwriters.
| SEBI has allowed the Underwriting Commission maximum @ of 2.5% of issue price of equity shares but Companies Act allowed for maximum @ of 5%. |