Page 10 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 1: Introduction to Capital Market

(b) Outright purchase: The underwriter, in this method, makes outright purchase of Notes
shares and resells them to the investors.
(c) Consortium method: Underwriter is jointly done by a group of underwriters in this
method. The underwriters form syndicate for this purpose. This method is adopted
for large issue.

Advantages of Underwriting
Underwriting assumes great significance as it offers the following advantages to the
issuing company.

(a) The issuing company is relieved from the risk of finding buyers for the issue offered
to the public. The company is assured of raising adequate capital.
(b) The company is assured of getting minimum subscription within the stipulated
time, a statutory time, a statutory obligation to be fulfilled by the issuing company.
(c) Underwriters undertake the burden of highly specialized function of distributing
securities.
(d) Provide expect advice with regard to timing of security issue, the pricing of issue,
the size and type of securities to be issued etc.

(e) Public confidence on the issue enhances when underwritten by reputed underwriters.

Notes The underwriters in India may be classified into two categories:
1. Institutional underwriters
2. Non-institutional underwriters.
The institutional underwriters are:
(a) Life Insurance Corporation of India (LIC)

(b) Unit Trust of India (UTI)
(c) Industrial Development Bank of India (IDBI)
(d) Industrial Credit and Investment Corporation of India (ICICI)
(e) Commercial Banks and General Insurance Companies.

The pattern of underwriting of the above institutional underwriters differs vastly in India.
LIC and UTI have purchased industrial securities from the new issue market with a view
to hold them on their own portfolio. They have a preference for underwriting shares in
large and well-established firms. The development banks have given special attention to
the issues in backward states and industries in the priority list. The thrust of the development
is towards states and industries in the priority list. The thrust of the development banks is
also towards small and new issues, which do not have adequate support from other
institutions. General insurance companies have shown preference in underwriting the
securities of fairly new issues.
The non-institutional underwriters are brokers. They guarantee shares only with a view
to earn commission from the company floating the issue. They are known to off-load the
shares later to make a profit. The brokers work profit motive in underwriting industrial
securities. After the elimination of forward trading, stock exchange brokers have begun to
take an underwritten to the total private capital issue varying between 72 to 97%.

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