The person or institutions underwriting a public issue of shares or debentures are called underwriters. Underwriters may be individuals, partnership firms or joint stock companies.
As per SECURITIES AND EXCHANGE BOARD OF INDIA (UNDERWRITERS) REGULATIONS, 1993, person who engages in the business of underwriting of an issue of securities of a body corporate is known as underwriter;
An agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them is known as underwriting agreement.
No person shall act as underwriter unless he holds a certificate granted by the board under these regulations. Every stock broker or merchant banker holding a valid certificate of registration shall be entitled to act as an underwriter without obtaining a separate certificate under these regulations.
Application For Grant of Certificate
An application by an underwriter for grant of a certificate of initial registration shall be made to the Board in Form A.
An application for registration made under sub-regulation (1) shall be accompanied by a non-refundable application fee.
Notwithstanding anything contained in sub-regulation (1), any application made by an underwriter prior to the coming into force of these regulations containing such particulars or as near thereto as mentioned in Form A shall be treated as an application made in pursuance of sub-regulation (1) and dealt with accordingly.
Consideration of Application
The Board shall take into account for considering the grant of a certificate, all matters which are relevant to or relating to underwriting and in particular the following, namely, whether the applicant—
(a) Has the necessary infrastructure, like adequate office space, equipments and manpower to effectively discharge his activities;
(b) Has any past experience in the underwriting or has in his employment minimum two persons who had the experience in underwriting;
(c) Or any person, directly or indirectly connected with the applicant has not been granted registration by the Board under the Act.[Explanation.—For the purposes of this clause the Board shall take into account whether a previous application for a certificate of any person directly or indirectly connected with the applicant has been rejected by the Board or any disciplinary action has been taken against such person under the Act or any of the rules or any of the regulations made under the Act
(d) Fulfils the capital adequacy requirements specified in regulation;
(e) or any of its director, partner or principal officer is or has at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence;
(f) Is a fit and proper person.
Criteria For Fit And Proper Person
For the purpose of determining as to whether an applicant is a fit and proper person the board may take account of any consideration as it deems fit, including but not limited to following criteria in relation to applicant:
Integrity, reputation and character,
Absence of conviction and restraint orders,
Competence including financial solvency and net worth,
bsence of categorization as a wilful defaulter.
Capital Adequacy Requirement
(1) The capital adequacy requirement referred to regulation shall not be less than the net worth of rupees twenty lakhs.
(2) Notwithstanding anything contained in (1), every stock-broker, who acts as an underwriter shall fulfil the capital adequacy requirements specified by the stock exchange of which he is a member. Explanation: For the purposes of this regulation, “net worth” means,— (a) in the case of an applicant being a proprietary concern or a firm or an association of persons or anybody of individuals, the value of capital contributed to such business by the applicant and the free reserves of any kind belonging to the business of the applicant; and (b) in the case of a body corporate, the value of the paid-up capital and the free reserves as disclosed in the books of account of the applicant at the time of making the application under sub-regulation (1) of regulation 3
Grant of certificate of initial registration
(1) The Board, on being satisfied that the applicant is eligible, shall send intimation to the applicant, within one month of such satisfaction, mentioning that it has been found eligible for grant of certificate of initial registration and grant a certificate in Form B.
(2) The certificate of initial registration granted under sub-regulation (1) shall be valid for a period of five years from the date of its issue to the applicant.
(3) The underwriter who has already been granted a certificate of registration by the Board, prior to the commencement of the Securities and Exchange Board of India (Underwriters) Regulations 2011, & has not completed a period of three years, shall be deemed to have been granted a certificate of initial registration for a period of five years from the date of its certificate of registration, subject to payment of fee for the remaining period of two years, as prescribed under Schedule II of these regulations.
(4) The grant of certificate of initial registration shall be subject to payment of fees specified in regulation.
Conditions of registration:
(1) Any initial registration granted under regulation or any permanent registration granted under regulation shall be subject to the following conditions, namely:—
(a) Where the underwriter proposes change in control, it shall obtain prior approval of the Board for continuing to act as such after the change;
(b) It shall enter into a valid agreement with the body corporate on whose behalf it is acting as underwriter;
(c) It shall pay the fees for initial registration or permanent registration, as the case may be, in the manner provided in these regulations;
(d) It shall maintain capital adequacy requirements specified in regulation at all times during the period of the initial registration or permanent registration;
(e) It shall abide by the regulations made under the Act in respect of the activities carried on by it as underwriter.
(2) Nothing contained in clause (a) of sub-regulation (1) shall affect the obligation to obtain a fresh under section 12 of the Act in cases where it is applicable.
Consideration payable to the underwriters for underwriting the issue of shares or debentures of a company is called underwriting commission. These commissions are paid at a specified rate on the issue price of the whole of the shares or debentures underwritten whether or not the underwriters are called upon to take up any shares or debentures. So, the underwriters are paid for the risk they bear in the placing of shares before the public. Underwriting commission may be in addition to brokerage.
Section 40 (6) of the Companies Act 2013, provides that a company may pay commission to any person in connection with the subscription or procurement of subscription to its securities, whether absolute or conditional, subject to the following conditions which are prescribed under Companies (Prospectus and Allotment of Securities) Rules, 2014:
(a) Payment of such commission shall be authorized in the company’s articles of association;
(b) Commission may be paid out of proceeds of the issue or the profit of the company or both;
(c) Rate of commission paid or agreed to be paid shall not exceed, in case of shares, (5%) of the price at which the shares are issued or a rate authorised by the articles, whichever is less, and in case of debentures, shall not exceed two and a half per cent (2.5 %) of the price at which the debentures are issued, or as specified in the company’s articles, whichever is less;
(d) The prospectus of the company shall disclose – the name of the underwriters; – the rate and amount of the commission payable to the underwriter and number of securities which is to be underwritten or subscribed by the underwriter absolutely or conditionally.
(e) There shall not be paid commission to any underwriter on securities which are not offered to the public for subscription;
(f) A copy of the contract for the payment of commission is delivered to the Registrar at the time of delivery of the prospectus for registration. Thus, the Underwriting commission is limited to 5% of issue price in case of shares and 2.5% in case of debentures. The rates of commission given above are maximum rates. The company is free to negotiate lower rates with underwriters.
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