Primary market intermediaries: Underwriters

Another important intermediary in the new issue/primary market is the underwriters to the issues of capital who agree to take u securities which are not fully, subscribed. They make a commitment to get the issue subscribed either by other or by them. Through underwriting is not mandatory after April 1995, its organization is an important element of the primary market. Are appointed by the issuing companies in consultation with the lead manager/ merchant banker to the issues. A statement to the effect that in the opinion of the lead manager, the underwriters asset are adequate to meet their obligation should be incorporated in the prospectus certificate.

Registration

To act as underwriter, a certificate of registration must be obtained from the SEBI in granting the registration, the SEBI considers all matters relevant relating to the underwriting and in particular,

  • The necessary infrastructural like adequate office space, equipment and manpower to effectively discharged the activity:
  • Past experience in underwriting/ employment of at least two persons with experience in underwriting:
  • Any person directly/ indirectly connect with the applicant is not registered with the SEBI as underwriter or previous application of any such person has been rejected or any disciplinary action has been taken against such person under the SEBI act/rules/regulation.
  • Capital adequacy requirement of not less than the net worth ( CAPITAL + free reserve) of Rs. 20 lakh: and
  • The applicant/ director/ principle officer/ partner has been convicted of offence involving moral turpitude or found guilty of any economic offence. Fee underwriters, had to, for 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 year and Rs 1 lakh for the third year. A fee of Rs 20,000 was payable every year to keep the certificate in force or for its renewal. Since 1999 the registration fee has been raised to Rs 5 lakh. To keep the registration in force, renewal fee of Rs 1 lakh. Every three years from the forth year the date of initial registration is payable. Failure to pay the fee would result in the suspension of the certificate of registration.

General obligations and responsibilities of Underwriters:

a) Code of conduct :

Every underwriter has at all time to abide by a code of conduct; he has to maintain high standard of integrity, dignity and fairness in all his dealings with his clients and, other underwriters in the conduct of his business. He has to ensure that he and his personal act in an ethical manner in all dealing with the issuers of capital. An underwriter has to rendered high standard of service exercise due diligence, ensure proper care and exercise independent professional judgment. He must disclose to 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. He must not make any written or oral statement to misrepresent…

  • The service that he to be capable of performing for the issuer/ or has rendered to    other issuer or
  • He underwriting commitment

He should not divulge to other issuer/ any party any confidence information about his issuer, which forms the come to his knowledge and deal in securities of any issuer without disclosing to the SEBI or to the board of director of the issuer. An underwriter should not willfully make untrue statement/suppress material fact in any document, reports, papers or information furnished to the SEBI.

b) Agreement with clients:

Every underwriter has to enter into an agreement with the issuing company. The agreement, among others, provides for the period during which the agreement is in for amount of underwriting obligations, the period within which the underwriter has to subscribe to the after being intimated by/on behalf of the issue, the amount of commission/ brokerage, and detail of arrangement, If any , made by the underwriter for fulfilling the underwriting obligations.

c) General responsibilities :

An underwriter cannot derive any direct or indirect benefit from underwriting the issue other than by the underwriting commission. The maximum obligation under all writing agreements of an underwriter cannot exceed 20 times his net worth, underwriters have to subscribe for securities under the agreement within 45 days of the receipt of intimation from he issuer.

d) Inspection and disciplinary proceedings:

The framework of the SEBI right to undertake the inspection of the book of account, other record documents of the underwriters, the procedure for inspection and obligation of the underwriters is on the same pattern as applicable to the lead manager

e) Action in case of default :

The liability for action in case of default arising out of

  • Non-compliance with any conditions subject to which registration was granted,
  • Contravention of any provision of the SEBI act/rules/ regulation underwriter involves the suspension/cancellation of registration: the effect of suspension/ cancellation on the lines followed by the SEBI in case of lead manager.

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