Default by Underwriters –Penal action

Action in Case of default: The liability for action in case of default by an underwriter involves suspension/cancellation of registration and the effect of suspension/cancellation is on the lines followed by the SEBI in the case of lead managers.

Operational Guidelines Instructions:

All underwriters are required to enter into legally binding underwriting agreement with the issuers, within the framework of the requirements of the Companies Act and the SEBI rules and regulations. The lead managers have to satisfy themselves about the ability of the underwriters to discharge their underwriting obligations and a statement to the effect that in their opinion the underwriters assets are adequate to meet the obligations should be incorporated in the prospectus.

Before executing the agreement, the underwriter has to satisfy himself with the terms of the issue and other information and disclosures in the prospectus prior to its filing with the ROC (Registrar of Companies). The prospectus has to be delivered to the ROC or registration not later than 30 days from the date of underwriting agreement or such an extended period the underwriter may approve in writing.

If after filing the prospectus with the ROC, any additional disclosures are to be made by the issuer in the interest of the investors as stipulated by the SEBI/lead managers, compliance of such requirement is binding on the underwriters. Such disclosures should not give right to the underwriter to avoid obligations unless they are certified by the SEBI to be material in nature and essential for the contract of underwriting.

The issuer has to supply to the underwriter a specified quantity of application forms and prospectus as soon as they are filed with the ROC, but in any case not less than 21 days prior to the date of opening of the public issue, a proof of which must be retained by the company. The subscription list has to be opened before three months from the date of the underwriting agreement or such an extended period as agreed to by the underwriter in writing. The list has to be kept open, in case the issue is not oversubscribed, for a minimum period of 10 days failing which the underwriter is not bond to discharge his obligations. Although the underwriter entitled to arrange for sub- underwriting, but they would not be responsible for any failure/default on the part of the sub underwriters to discharge their obligations.

The issuer has to warrant that all statutory and other approvals made in connection with the issue detailed in the prospectus/ required to complete the prospectus have been obtained / will be obtained and would be effective till the allotment of shares/debentures are complete.

The applications bearing the stamp of the underwriters /sub underwriters are treated in the same manner as those received directly from the public and are not entitled to any preference /priority in the matter of allotment in case of oversubscription.

The underwriting obligation in case of under subscription, subject to the overall ceiling of twenty times the net worth of an underwriter, is computed as: total underwriting commitment less applications received from the underwriters including those bearing their stamp plus proportionate applications from public independently plus proportionate share of excess subscription by one/more individual underwriters. Within 30 days of the date of closure of the of the subscription list, the issuer has to communicate in writing his support computation from its auditors.