‘Underwriting’ is a contract entered into between the company and certain parties before the issue of the shares or debentures to the public for subscription. The contract entered into between the two is that if in case the whole or an agreed portion of the shares or debentures are not applied, then the underwriters themselves will take the unsubscribed share or debentures. They can also procure other person to apply for them. The company has no interest in knowing how the Underwriters procure the purchases. Thus, the underwriter exposes themselves to great risk, by placing the shares before the public. In return of this risk they get commission which is called Underwriting commission. Underwriting is on the nature of insurance against the possibility of inadequate subscription.
According to the SEBI guidelines 2000 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 public do not subscribe to the securities offered to them.
Conditions: section 76 allows the payment of underwriting commission subject to the compliance of the following conditions:
- The payment of commission must be authorized by the articles of the company.
- The names and address of the underwriters should be disclosed.
- A disclosure must be there about the Underwriting commission in the prospectus or statement in lieu of prospectus.
- The amount of the Underwriting commission payable should not exceed 5% in case of shares and 2.5% in case of debentures. If the Articles permit the company can have lesser percent of commission.
- The commission can be paid in cash or in kind as agreed between two parties.
- A disclosure should also be there I relation to the number of shares or debentures which the person have agreed to subscribe absolutely or conditionally.
- A copy of contract in relation to the payment of commission should be delivered to the Registrar of Companies.
- Underwriting commission may be paid in respect of debentures offered to the members or a right basis.
- The Underwriting commission will not be paid on the shares or debentures, which are not offered to public for subscription. But where a person has subscribed or agreed to subscribe under sub-section (1)
(a) For any issue in or debenture of the company and before the issue of the prospectus statement in lieu there of any other person or persons has or more subscribed for any or all those shares & debentures.
(b) The fact together will the aggregate amount of commission payable under this section in respect of such subscription is disclosed in the prospectus or statements then the company will pay commission to first mentioned persons [section 76(4A)]
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