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Unit 3: Primary Market and Secondary Market

Underwriting may take different forms depending on nature of the agreement entered into Notes
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’.

3.3.3 Bankers to an Issue

Bankers represent an important segment of Indian primary market. They carry out the function
of accepting applications and application moneys from investors in respect of securities and
refunding of application money to the applicants to whom securities could not be allotted. They
also participate in the payment of dividends by companies.

Tasks and Responsibilities of Bankers to an Issue

The following guidelines with respect to duties and responsibilities of bankers to an issue have
been laid down by the SEBI:

A banker intending to act as banker to an issue can do so by getting itself registered with
the SEBI and obtaining a certificate of registration to that effect. The SEBI issues the certificate
on being satisfied about the availability of the necessary infrastructure, communication
and data processing facilities with the applicant and the adequacy of manpower to
effectively perform activities relating to the issue.
An annual registration fee of ` 2.5 lakh for the first two years from the date of initial
registration and ` 1 lakh for the third year has to be paid by the banker to an issue to the
SEBI. The renewal fees are ` 1 lakh annually for the first two years and ` 20,000 for the third
year.
A banker is required to enter into an agreement with the issuing company, specifying
number of centres at which applicants from investors will be collected and the time within
which statements regarding applications and money received will be sent to the registrars
to the issue by the designated branches of the banker to the issue.

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