Comparative Of Indian And USA Models of underwriters.

Nature of service

India its fee-based. Becomes contingently fund-based.

USA its fund-based

Method of underwriting

IndiaStandby support that would devolve on the underwriter only if the issue is under-subscribed

USAFirm underwriting wherein the underwriters guarantee the issue irrespective of investors’ response.

Nature of underwriting contract

IndiaIt provides a contingent obligation on the underwriter to purchase the securities on offer.

USAit is a contract of purchase and sale wherein underwriters purchase securities from the issuer at a lower price and sell them to investors at the offer price.

Extent of obligation to purchase

IndiaTo the extent of devolvement.

USATo the extent of amount underwritten.

Role of underwriter

IndiaProviding marketing support, moving the market through distribution and taking up devolvement if any.

USATaking the risk of guarantee, pricing the offer, moving the market and allocation to dealers and investors.

Compensation

IndiaUnderwriting commission. This is a fee earmarked as a percentage to the underwriting obligation

USAMain compensation is the underwriting spread, i.e. the spread b/w offer price and the price paid to the issuer company.

Underwriting risk

IndiaContingent risk that is a function of market risk, waiting risk and pricing risk.

USAActual risk which is a function of market risk, waiting risk and pricing risk.

Green shoe option

IndiaDecided by the issuer. Used in an over-subscribed offer to provide additional allotments to investors.

USADecided by the underwriter. Used in an over-subscribed issue to provide additional allocation to investors.

Allocations

IndiaAllotment are made directly to investors as per SEBI guidelines by the issuer company in consultation with the stock exchange . Post-issue lead manager oversees the function. Therefore, allotments are governed by statutory norms.

USAThe lead underwriter decides allocation of shares to syndicate members. The syndicate members in turn decide allocations to their investors. Allocations are entirely at the discretion of underwriters.

Documentation

IndiaUnderwriting Agreement- b/w issuer and each underwriter.Broker Agreement – b/w issuer and broker to issue.

USAUnderwriting Agreement-b/w issuer and lead underwriter.Agreement among underwriters- inter se b/w syndicate members.Dealer Agreement- b/w syndicate member and dealer.

From Ankit ChauhanMBA-IV