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Unit 10: Underwriting of Shares

10.3 Types of Underwriting Notes

There can be the following three main types of underwriting agreements between the company
and underwriters:

(i) Complete Underwriting Agreement: When the underwriter gives the guarantee to the
company that whole issue will be subscribed by the public, it is called complete
underwriting. In this case the whole issue is underwritten by one or more underwriters
and collectively or individually they agree to take the entire risk.

(ii) Partial Underwriting Agreement: When only a part of issue of shares or debentures is
underwritten by the underwriters, it is called partial underwriting. This underwriting can
also be done by one or more persons or institutions.

(iii) Firm Underwriting: When an underwriter makes an agreement to purchase a certain
number of shares or debentures of the company, in addition to the shares or debentures he
has to take under the underwriting agreement, it is called firm underwriting. The
underwriters under such agreement get the priority over general public in relation to
allotment of shares or debentures in the conditions of oversubscription. For example, if
underwriter has entered into an agreement for firm underwriting of 2,000 shares out of
total 10,000 shares issued, only 8,000 shares will be available for the public even, if there
are applications for 15,000 shares.

10.4 Advantages and Objectives of Underwriting

(i) Certainty regarding subscription on part of the public: If a company enters into an
agreement with underwriters at the time of issue of an shares or debentures, there will be
certainty that shares will be taken over by the public. In the absence of underwriting
agreement, there will be uncertainty regarding its subscription by public. This uncertainty
is automatically removed when underwriters give their guarantee to the company.
(ii) More Confidence Amongst Public: If a company has concluded an agreement with
underwriters, the names and addresses of the underwriters are given in the prospectus.
Appearance of names and addresses of the underwriters leads to more confidence amongst
the public. They feel that the company has a good position which is why the underwriters
have entered into an underwriting agreement with the company; which would not have
been the case otherwise.

(iii) Underwriting creates goodwill for the company: Underwriting increases goodwill of the
company. Generally, underwriters enter in an agreement for guaranteeing the shares and
debentures with those companies which have a sound position and whose future is bright.
The underwriters know that if the shares or debentures are not subscribed by the public
they will have to take up these shares or debentures, hence the ultimate burden will fall on
them. Due to this reason, underwriting agreement creates an impression regarding the
sound status of the company.

10.5 Requirement of Disclosure of Underwriting Agreement

According to the provisions of Companies Act 1956, an underwriting agreement should be
disclosed in the following:
(i) In the Prospectus: If an underwriting agreement is concluded with the underwriters by
the company, their names and addresses and the opinion of the directors regarding the
discharge of the obligations of the underwrites should be disclosed in the prospectus of
the company. Alongwith this information, the number of shares or debentures, which the

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