Another important intermediary in the new issue market is the underwriters to issues of capital who agrees to take up securities which are not fully subscribed. He makes a commitment to get the issues subscribed either by others or by himself. Though underwriting is not mandatory after April 1995, its organization is an important element of the primary market. Underwriters are appointed by the issuing companies in consultation with the lead managers/merchant bankers to the issue. A statement to the effect that in the opinion of the lead manager, underwriters’ sets are adequate to meet their obligations should be incorporated in the prospectus.
To act as an underwriter, a person must obtain a certificate or registration from the SEBI. However, merchant bankers and stock brokers holding a valid certificate of registration from the SEBI do not need separate registrations to act as underwriters. Their underwriting activities are, however, governed by the same rules and regulations.
In granting the certificate of registration, the SEBI considers all matters relevant/relating to the underwriting and in particular, (1) the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge his activities, (2) past experience in underwriting/employment of at least two persons with experience in underwriting, (3) capital adequacy requirement of not less than the net worth of Rs 20 lakh. Further, it checks whether any person connected with the applicant has been registered by the SEBI for the purpose, and whether the applicant/director/principal officer/partner has been convicted of offence involving moral turpitude or found guilty of any economic offence.
Fee: Underwriters, other than brokers and merchant bankers, have to, or grant or renewal of registration, pay a fee to the SEBI from the date of initial grant of certificate, Rs 2 lakh for the first and second years and Rs 1 lakh for the third year. A fee of Rs 20,000 is payable every year to keep the certificate in force or for its renewal.
General Obligations ad responsibilities:
Code of conduct: Every underwriter has to at all times abide by the code of conduct specified below:
1. Maintain high standards of integrity, dignity and fairness in all his dealings with is clients and other underwriters in the conduct of is business.
2. Ensure that he and his personnel act in an ethical manner in all dealings with the issuers of capital.
3. Render high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment.
4. Disclose the issuer his possible source/potential areas of conflict of duties and interest of other underwriters/to place them in a disadvantageous position in relation to him while competing for/carrying out any assignment.
5. Not take any written or oral statement to misrepresent (1) the services that he is capable of performing for/or has rendered to other issuers or (2) his underwriting commitment.
6. Not divulge to other issuers/ any party any confidential information about his issuer, which has come to his knowledge and deal in securities of any issuer without disclosing to the SEBI or to the board of directors of the issuer.
7. Not willfully make sure untrue statements/suppress material fact in any documents, reports, papers or information furnished to the SEBI.
Agreement with clients: Every underwriter enters into an agreement with the issuing company. The agreement, among others, providers for the period during which the agreement is in force, the amount of underwriting obligations, the period within which the underwriter has to subscribe to the issue after being intimated by/on behalf of the issuer, the amount of commission/brokerage, and details of arrangement, if any, made by the underwriter for fulfilling the underwriting obligations.
General Responsibilities: An underwriter cannot drive any direct or indirect benefit from underwriting the issue other than by the underwriting commission. The maximum obligation under all underwriting agreements of an underwriter cannot exceed twenty times his net worth. Underwriters have to subscribe for securities under the agreement within 45 days of the receipt of intimation from the issuers.