DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : MAJOR K. SIVA KUMAR
Designation : HEAD OF SECTION
Branch : Diploma in Commercial and
Computer Practice
Institute : Government Polytechnic, Srikakulam
Year/Semester : V Semester
Subject : Banking
Subject Code : CCP504(B)
Topic : Lead Banks and Merchant Banking
Duration : 50 Mts
Sub Topic : Banker’s Role as Underwriters
Teaching aids : PPT and Animations
CCP-504(B).90 1
Regulatory Frame work of SEBI
on Underwriters :
Objectives:-

On completion of this period, you would be

able to:

 Know the regulatory framework of SEBI on

underwriters

CCP-504(B).90 2
Recap :
In the previous class, you have learnt the meaning of
underwriting and general responsibilities of
Underwriters. They are:
 Underwriting is another important activity in the New
Issue/Primary market.
 Underwriting is nothing but insurance against
inadequate subscription.
 Merchant bankers appoint the underwriters in any
new issues.

CCP-504(B).90 3
Recap (Contd..) :

 Underwriters should not derive any indirect benefit

from the new issue except underwriting
commission.
 The maximum obligation of the underwriters
should not exceed 20 times of their net worth.
 They have to subscribe for the securities under
agreement within 45 days from the date of receipt
of intimation by the issuers.

CCP-504(B).90 4
Known to Unknown :

1. Underwriters are under the control of the

following authority.
a) RBI
b) SEBI
c) Parliament
d) None

CCP-504(B).90 5
Known to Unknown :

2. Who appoint underwriters ?

a) Issuing company in consultation
with the Merchant Banker
b) Government
c) Board of Directors
d) All the above

CCP-504(B).90 6
Known to Unknown :

3. Underwriters have to follow certain rules and

regulations in conducting their activities
a) Yes
b) No
c) Not Known
d) None of the above

CCP-504(B).90 7
Regulatory Framework of SEBI :

Now in this class you will know the regulatory

framework of SEBI:
 According to latest SEBI guidelines, full
underwriting is mandatory for all Public issues
 The following are the rules by SEBI for
underwriting:-

Registration:
 To act as an underwriter, a certificate of
registration must be obtained from SEBI.

CCP-504(B).90 8
Regulatory Framework of SEBI :
For getting certificate of registration, the Underwriters
have to fulfill the following conditions:
 They must have necessary infrastructure
e.g. Adequate office space, equipment and
manpower
 They should have past experience in
underwriting/employment of at least two persons with
experience in underwriting
 They should have a net worth (capital + free
reserves) of Rs. 20 lakh
CCP-504(B).90 9
Fee :

 The underwriters have to pay the prescribed fee

for getting the registration certificate initially.
 They have to pay the renewal fee every year.
 Non-payment of renewal fee would result in the
suspension of the certificate of registration.

CCP-504(B).90 10
Code of Conduct :

 Every underwriter has to abide by a code of

conduct at all times.
 He has to maintain high standards of integrity,
dignity and fairness in all his dealings with his
clients and other underwriters in the conduct of his
business.
 He has to ensure that he and his personnel act in
an ethical manner in all dealings with the issuers
of capital.
CCP-504(B).90 11
Code of Conduct (Contd..) :

 An underwriter has to render high standards of

service, exercise due diligence, ensure proper
care and exercise independent professional
judgment.
 He must disclose to the issuer his possible
source/potential areas of conflict of duties and
interest of other underwriters to place them in a
disadvantageous position in relation to him while
competing for/carrying out any assignment.

CCP-504(B).90 12
Code of Conduct (Contd..) :

 He must not make any written or oral statement to

misrepresent.
 The services that he is capable of performing
for the issuer/or has rendered to other
issuers or
 His underwriting commitment.
 He should not divulge to other issuers/any party
any confidential information about his issuer,
which has come to his knowledge.

CCP-504(B).90 13
Code of Conduct (Contd..) :

 He should not deal in securities of any issuer

without disclosing to the SEBI or to the Board
of Directors of the issuers.
 An underwriter should not willfully make untrue
statement/suppress material fact in any
document, reports, papers or information
furnished to the SEBI.

CCP-504(B).90 14
Agreement with Clients :

Every underwriter has to enter into an agreement

with the issuing company.
 The agreement contains the following aspects:
 The period during which the agreement is in
force.
 The amount of underwriting obligation.

CCP-504(B).90 15
Agreement with Clients :

 The period within which the underwriter has to

subscribe to the issue after being intimated by/on
behalf of the issuer.
 The amount of commission / brokerage , and
details of arrangements, if any, made by the
underwriter for fulfilling the underwriting
obligations.

CCP-504(B).90 16
Amount of Commission :
Section 76 of the Companies act, 1956, Permits
payment of underwriting commission to the
underwriter, subject to the following conditions:
 The payment of commission should be
authorized by the articles.
 The commission should not exceed 5 per cent
of issue price in case of shares.
 The commission is 2.5 percent of the issue
price in case of debentures.

CCP-504(B).90 17
Amount of Commission :

 However, if the articles provide for a lower rate,

the commission should not exceed the amount
or rate authorized by the articles.
 The rate of amount of commission should be
disclosed in the prospectus.

CCP-504(B).90 18
Amount of Commission :
 A copy of the contract for payment of the
commission should be delivered to the registrar
at the time of delivery of the prospectus or the
statement in lieu of prospectus for registration
 In case of banking companies, section13 of the
Banking Regulation Act provides that the
commission in respect of any shares issued by it
should not exceed in aggregate 2.5 percent of
the paid-up value of the said shares

CCP-504(B).90 19
Action in Case of Default :

SEBI can suspend / cancel the registration of an

underwriter in the following cases:

 No compliance with any conditions subject to

which registration was granted.
 Contravention of any provision of the SEBI
Act / rules / regulations.

CCP-504(B).90 20
Summary :

 To act as underwriter, SEBI has to grant a

Certificate of registration.
 For this purpose they have to pay necessary
fee initially and renewal fee every year.
 SEBI can inspect the books of accounts of
underwriters.
 The amount of commission is authorized by
articles of the company.

CCP-504(B).90 21
Summary (Contd..) :
 The commission should not exceed 5 per cent of
issue price in case of shares.
 The commission is 2.5 percent of the issue price
in case of debentures.
 They have to make an agreement with the clients
to act as underwriters.
 Underwriters are liable for suspension /
cancellation of registration if they do not comply
with the rules / provisions of SEBI Act.
CCP-504(B).90 22
Quiz :

1. Underwriters should abide by the

a) Rewards
b) Punishments
c) Code of conduct
d) None

CCP-504(B).90 23
 Quiz :

2. The Underwriters are liable for suspension /

cancellation of registration is which of the
following cases.
a) Non-compliance with any conditions
set by SEBI
b) Contravention of any Provision of
the SEBI Act
c) RBI rules
d) Both a & b

CCP-504(B).90 24
Frequently Asked Questions :

1. Explain the regulatory framework of SEBI on

underwriters ?

CCP-504(B).90 25
Assignment :

1. Know the popular underwriters in India.

2. Know the latest rules in respect of fee for
registration and renewal.
3. Study the prospectus of a recent public issue
and observe who are underwriters for that
issue.

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