Posted in Finance, Accounting and Economics Terms, Total Reads: 828
Underwriter is the body which is given the distribution rights of the stocks among the common public . It is a safer practice of selling the stocks to the underwriters who buy these stocks themselves in case of an under subscription .
The underwriters charge a fee from the issuer of the stocks but assume complete responsibility of selling the complete lot. In case of unsold stocks they have to be repurchased by the underwriters or sold at a loss. The process of earning an underwriter’s approval is a long one after filing for the initial public offer.
The underwriter does the market analysis of the company before buying the issue. The number of buyers are governed by the rating of the firm ie a well reputed company can have several buyers . The terms of agreement depend on the level of risk . A highly profitable issue would attract a complete buyout by the underwriters however in riskier situations of unfamiliar companies it is however avoided .
The role of an underwriter is to documentation, organization and maintenance of filing a nomination. A small brochure is also released by the name of red herring prospectus which gives out details of the projects the company looks to invest and justifies the sources of returns for the investors. It also adheres to a strict compliance to the regulations mentioned by the security Exchange commission of India.