unit-6-sources-of-long-term-finance-and-underwriting

Unit-6 Sources Of Long-Term Finance And Underwriting

In this unit we shall examine in detail the nature and importance of long-term finance.

What is meant by 'Underwriting' of shares and debentures? How does it help. companies in raising Long-term finance? Discuss briefly the terms and conditions relating to underwriting of shares and debentures?

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Learning Pundits Content Team

Written on Apr 15, 2019 6:30:39 PM

Underwriting of securities refers to an agreement between the promoters or directors of a company and another party (the underwriter) whereby the latter agree to take up the whole or part of the shares or debentures issued which may not be subscribed by the public. The company agrees to pay commission at an agreed rate to the underwriter subject to the maximum rate laid down in the Companies Act.

Companies are assured of the availability of finance by virtue of the underwriting agreement. Companies sometimes get the benefit of expert advice from the underwriters. Since the underwriters fully satisfy themselves about the soundness of the company which is raising the capital, investors run less risk when they subscribe to the issues which have been underwritten.

Terms and Conditions of Underwriting

There is a written agreement between the company and the underwriter known as the 'Underwriting Agreement' (or Contract). Usually the following aspects are specified in this agreement.

i. The number of shares or debentures which are agreed to be underwritten

ii. An undertaking by the underwriters to take up such of the shares or debentures as are not subscribed by the public.

iii. An undertaking by the company that the terms of issue given in the prospectus will not be changed without the consent of underwriters.

iv. Authority of the underwriters to the company to allot them the balance of shares or debentures not taken up by the public

v. The rate of commission to be paid to the underwriters and the mode of payment



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