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underwriter

What do you mean by the underwriter?

An underwriter is a party or a risk expert who evaluates the risk or creditworthiness of another party. He also assumes or guarantees the creditworthiness of the other party in exchange for a fee. This fee is the commission, premium, or interest. The underwriters are critical to the financial market being risk experts. They are critical to the mortgage industry, insurance sector, equity, and debt markets, etc. 

What are the types of underwriting?

There are different types of underwriting:

  1. Firm Underwriting: The underwriter agrees to buy a definite number of shares. These shares are in addition to the number of shares, the underwriter promised to subscribe for. 
  2. Complete Underwriting: The underwriter agrees to underwrite the entire issue of equity or debt. 
  3. Partial Underwriting: Here only a part of the entire issue of shares or debentures forms a part of underwriting.
  4. Syndicate Underwriting: This is the case when an issue is too huge. Here two or more underwriters jointly undertake and underwrite the issue
  5. Joint Underwriting: Similar to syndicate underwriting, here as well the size of an issue too huge for a single underwriter to underwrite. The underwriter appoints others to jointly underwrite the issue
  6. Sub-Underwriting: If at any given point, an underwriter feels the issue is beyond his/her capacity, appoints a sub-underwriter. Here the contractual relationship between both is that of a principal and an agent

Is underwriting mandatory?

As per the earlier guideline of SEBI, it was mandatory to underwrite the entire issue with a minimum 90% subscription. Later on, the revised guideline made it clear that underwriting is not mandatory. The option of underwriting lies with the issuer. 

What is the complete underwriting?

Under complete underwriting, the entire issue is underwritten. In this case, either an individual underwriter undertakes the entire issue or clubs or joins hands with others. They then agree to take the risk to an agreed extent.

What is equity underwriting?

Just like debt underwriting, equity underwriting also involves buying of the shares and distributing it to the dealers or buyers directly by the underwriter. In addition, in case of an IPO, the underwriters also help the company in setting up the public offering. This will involve strategies like how much capital to raise, at what share price with how many shares. 

What is debt underwriting?

The underwriter purchases the agreed securities from the issuer with the intention of selling at a profit. They can sell these securities either in the marketplace or to the dealers. In turn, these dealers would distribute these securities to the buyers. 

Can an underwriter deny a loan?

Yes, an underwriter can reject your loan application. The rejection can be on grounds of the application, financial documents, credit score, risk factors that he/ she might find unsuitable. Basically, he/ she wants to know whether you can pay back the loan or not i.e. your creditworthiness.

Published on August 4, 2020