Underwriter

Posted in Finance, Accounting and Economics Terms, Total Reads: 749
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Definition: Underwriter

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.



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