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Unit 5: Primary Market

10. The merchant banker shall have to submit to the SEBI complete details of the acquisition Notes
of securities of the company whose issue the merchant banker is managing.
The SEBI has laid down codes of conduct which a merchant banker has to observe in the conduct
of his business. The codes include observance of high standards of integrity and fairness in its
dealings with the client and other merchant bankers, adequate disclosures to the investors about
the applicable regulations and guidelines so as to enable them to make a rational decisions,
provision of all professional services to the client in a prompt, efficient and cost-effective manner,
making available to the investors all the information relating to the issue, copies of prospectus,
memorandum and related documents, taking adequate measures for fair allotment of securities
and refund of application money without delay, prompt redressal to the grievances of the
investors, etc.

Underwriters

A company intending to garner funds from the market is not certain about the availability of the
desired quantum of funds through subscription of securities. To ensure the certainty, some sort
of institutional arrangement needs to be made whereby the issuing company is given the
guarantee of purchase of all unsubscribed securities. This arrangement is akin to insurance that
provides protection against the failure of an issue of capital to the public. Such an insurance
arrangement to ensure success of the issue is termed as 'underwriting'. Underwriters, therefore,
undertake the guarantee of buying the shares placed before the public in the event of non-
subscription of the securities. Thus, an issuing company has to enter into an agreement with an
underwriter who may be individual or institution for underwriting the issue. The obligation of
the underwriter as per the agreement arises when the event of non-subscription of issues by the
public takes place.

Underwriting may take different forms depending on nature of the agreement entered into
between the issuer and the underwriter. Thus, there may be standby underwriting, outright
purchase, joint underwriting, syndicate underwriting and sub-underwriting.
Under standby underwriting, underwriters enter into an agreement with an issuing company to
take all such securities as are not subscribed in the market or to buy certain portion of the
security issue. This type of underwriting is very popular in India.
In outright purchase, underwriters buy the entire issue outright and make the payment thereof.
Thereafter, they arrange to sell them to investors through their own organization. This type of
underwriting is very popular in the US.
Joint underwriting takes place where capital issue is large and risk is too high and in such cases,
the issuing company approaches more than one underwriter. Each underwriter undertakes to
guarantee for the issue of a certain portion of the whole issue offered to the public and thereby
shares the risk proportionately.
In syndicate underwriting, a number of underwriters enter into an agreement among themselves
to underwrite an issue particularly the one which is quite large and/or potentially risky. Syndicate
underwriting seems to be akin to joint underwriting. But actually this is not so. In the case of
joint underwriting, underwriters are approached by the issuer for underwriting an issue and no
agreement takes place among the underwriters themselves. In contrast, in the case of syndicate
underwriting, underwriters enter into a formal agreement among themselves to undertake the
guarantee of buying shares of debentures of a public issue.
Sub-underwriting of an issue takes place when an underwriter enters into agreement with some
other underwriters to underwrite the whole or part of the issue underwritten by him. In this
case, sub-underwriters do not enter into agreement with the 'issuing company'.

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