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.
There are different types of underwriting:
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.
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.
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.
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.
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.
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