Learn the meaning, process, and role of equity underwriting, along with its advantages, risks, and regulatory aspects.
Equity underwriting plays a central role in helping companies raise capital through public offerings. It provides assurance to issuers that their shares will be subscribed and gives investors greater confidence in the market. This section explains the definition, importance, process, agreements, benefits, risks, and examples of equity underwriting in practice.
Equity underwriting refers to the process where an underwriter, typically an investment bank or financial institution, guarantees the sale of shares issued by a company during an equity offering. By underwriting the issue, the underwriter commits to purchasing any unsubscribed shares, ensuring that the issuer raises the intended amount of capital. This process helps companies secure funding and provides stability in public offerings.
Equity underwriting is necessary because it gives assurance to companies raising capital that their issue will succeed, even if investor demand falls short. It also provides investors with confidence that the offering has been assessed and supported by a regulated intermediary. The importance of equity underwriting can be summarised as:
Provides certainty of capital to the issuer.
Reduces risks of undersubscription.
Enhances investor trust in the offering.
Improves efficiency of fundraising activities.
The equity underwriting process involves several stages. Each step ensures that the shares are successfully offered and subscribed. The key stages include:
Due diligence: The underwriter reviews the company’s financials, operations, and prospects.
Pricing: A suitable issue price is determined for the securities.
Agreement: The underwriting agreement is finalised between the company and the underwriter.
Marketing: The issue is promoted to potential investors through roadshows or announcements.
Subscription: Investors apply for shares during the offering period.
Underwriting support: The underwriter purchases any unsubscribed portion of the issue.
Listing: The securities are listed on the stock exchange for trading.
Different types of agreements govern how equity underwriting operates. The table below outlines the common types of underwriting agreements:
| Type of Agreement | Description |
|---|---|
| Firm Commitment |
The underwriter agrees to buy the entire issue and resell it to investors. |
| Best Efforts |
The underwriter does not guarantee full subscription but agrees to sell as much as possible. |
| Standby |
The underwriter agrees to purchase remaining shares not taken by shareholders in a rights issue. |
Equity underwriting offers several benefits to both companies and investors. These include:
Ensures fundraising goals are met.
Provides credibility and market confidence.
Distributes risk between the issuer and underwriter.
Enables companies to raise larger amounts of capital.
While equity underwriting is valuable, it also has certain limitations that must be considered:
High underwriting fees increase the cost of raising capital.
Market volatility may affect investor participation.
Underwriters face the risk of holding unsold shares.
Issuers may be dependent on the underwriter’s terms.
An example of equity underwriting can be seen in an initial public offering (IPO). Suppose a company issues shares worth ₹500 crores and appoints an underwriter. If only ₹400 crores are subscribed by investors, the underwriter is obliged to purchase the remaining ₹100 crores worth of shares. This ensures the company receives the full ₹500 crores, fulfilling its capital requirement.
Equity underwriting is subject to regulations to protect investors and ensure transparency. In India, the Securities and Exchange Board of India (SEBI) sets out rules regarding the role, eligibility, and obligations of underwriters. Regulations typically cover:
Registration and eligibility criteria for underwriters.
Capital adequacy requirements.
Disclosure obligations during the underwriting process.
Limits on the underwriting commitment relative to net worth.
Equity underwriting provides a safeguard for companies raising funds through public offerings and reassures investors about the credibility of the issue. While it offers benefits such as certainty of capital and enhanced trust, it also involves risks such as high fees and market dependency. A clear understanding of underwriting agreements and regulatory requirements helps stakeholders navigate the process effectively.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Equity underwriting means a financial institution or underwriter guarantees the subscription of shares in a public issue, ensuring the issuing company receives the planned amount of capital even if investor demand is lower than expected.
The equity underwriting process involves due diligence, pricing of shares, finalising an underwriting agreement, marketing the issue, collecting subscriptions, underwriter support for unsubscribed shares, and listing the securities on the stock exchange.
Equity underwriters are investment banks or financial institutions that commit to purchasing unsubscribed shares in an equity issue, while also managing due diligence, pricing, and marketing of the offering.
The common types of underwriting agreements in equity underwriting are firm commitment, best efforts, and standby agreements, each defining the extent of responsibility the underwriter assumes for unsold shares.
The benefits of equity underwriting for companies include guaranteed capital raising, improved market credibility, reduced risk of undersubscription, and access to larger investor participation.
The risks involved in equity underwriting include high costs for issuers, market volatility affecting investor demand, potential unsold shares held by underwriters, and dependency on underwriter terms.