CONCEPT OF UNDERWRITING IN LAW

The term “underwrite” originates in the 17th century when marine vessels would be underwritten for insurance risk for overseas voyages.Risk can defined as the possibility of incurring an amount loss.In the finance sector, it is the probability that the actual return of an investment will be different from the expected. The insurance company would sub-scribe (literally to write underneath or under-write) the policy by signing their name at the bottom of the document and acknowledging consent that the policy is in force.Underwriting is an agreement used in the sale of new issues of corporate securities. In underwriting, the underwriter will guarantee a certain price for a certain number of securities to the party that is issuing the security.The term underwriter originated from the practice of having each risk-taker write their name under the total amount of risk they were willing to accept for a specified premium.

Although the mechanics have changed over time, underwriting continues today as a key function in the financial world.Underwriting is the process through which an individual or institution takes on financial risk for a fee and assess the degree of risk of insurers’ business.Underwriting helps to set fair borrowing rates for loans, establish appropriate premiums, and create a market for securities by accurately pricing investment risk and ensures that a company filing for an IPO will raise the capital needed and provide the underwriters with a premium or profit for their services.Investors benefit from the vetting process of underwriting grants by helping them make informed investment decisions.

UNDERSTANDING UNDERWRITING

An insurer, its employees or agents, who consider an insurance proposal form and decides whether to accept a risk, the terms of the policy and calculate the premium, based on the information provided by the insured or potential insurer.Underwriting simply means that your lender verifies your income, assets, debt and property details in order to issue final approval for your loan. An underwriter is a financial expert who takes a look at your finances and assesses how much risk a lender will take on if they decide to give you a loan.Underwriting, whether for an insurance policy or a loan, revaluates the riskiness of a proposed deal or agreement. For an insurer, the underwriter must determine the risk of a policyholder filing a claim that must be paid out before the policy has become profitable. For a lender, the risk is of default or non-payment. Similarly, securities underwriting by investment banks evaluate newly issued shares and bonds to determine their risk-adjusted value.They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C’s: Capacity, Credit and Collateral.Monthly payments to an individual or non–disclosed credit account. Frontline underwriting of mortgage loans (retail, wholesale, jumbo, correspondent) on both a delegated and non-delegated basis.They mostly interpret credit policy guidelines and investor guidelines and apply them to specific loans for effective sale in the secondary market. The difference between actuaries and underwriters is that they perform different functions within an insurance company. Actuaries use data to determine the premium that should be charged for anyone that fits into a given bucket. Underwriters decide which bucket an insurance applicants fit into.

UNDERWRITING IN COMPANY LAW

Underwriting in the context of a company means undertaking a responsibility or giving a guarantee that the shares or debentures offered to the public will be subscribed for.If the shares or debentures are not taken up by the public wholly, the underwriters will have to take them up and pay for them.Unless and until the minimum subscription sum specified in the prospectus is raised in the public offering, a company may not assign shares offered in a public issue. It is the daredevil who comes to the rescue of the Insurer Company and plays with the associated risks. The risk-taker is known by underwriter name.

The underwriting method is followed by the companies in order to prevent under subscription of shares and to be sure of the volume of shares that will be subscribed.As provided for in Section 40(6) of the Companies Act, 2013, an issuer company can pay the Underwriting Commission to any individual or underwriting firm in connection with subscribing to its securities subject to such conditions as may be specified.Under Rule 13 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 an issuer company can, subject to certain conditions, pay commission to any individual in connection with the subscription or procurement of the subscription to its securities, whether absolute or conditional. The payment of the Underwriting Commission shall be exclusively granted in the Article of Association of the issuer company.’The underwriting commission may be paid out of the proceeds of the issue or the profit earned by the company or both.Without the authority given by section 40(6) of the Companies Act of 2013 and Rule 13 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 it would be illegal for a corporation to pay any such fee, and it would also be unconstitutional to offer securities at discount in a firm underwriting.The Underwriting commission shall, however, only be charged if the underwriter has subscribed or agreed to subscribe to the shares and not when he purchases the share, otherwise it would amount to a breach of Section 67, which prohibits any kind of financial assistance for the purchase of the company’s shares.Section 29 of the Companies Act, 2013, states that any corporation that makes a public offer and any other type or type of company or company that may be approved shall issue the securities only in the form of a decartelized way. The prospectus will list the particulars of the underwriter, such as his name, address and contact information, and the amount of securities that he has underwritten.

In addition to this draft prospectus, the underwriter must also file a report with the SEBI on due diligence. Copy of the final prospectus should then be submitted to the board and to the designated stock exchange where the securities are to be listed.The underwriter mainly has to submit a due diligence report three times, firstly when the prospectus is sent for registration to the ROC. Furthermore, just before the issue opens, it specifies that important corrective steps are being taken. And thirdly, after the issue has been opened for the general public but before the subscription closes. The aforementioned rules reduce any possibility for the Company or the Underwriter to induce investors to commit any kind of fraud or misrepresentation. Another clause that protects the interests of underwriters and sub-underwriters is Section 36 of the Companies Act, 2013, which makes any person liable under Section 477 who knowingly or negligently makes a false or misleading statement or hides relevant facts to induce a person to take out securities.

UNDERWRTING IN INSURANCE LAW

Underwriters balance the insurance company’s interest in being profitable against the likelihood of a client needing to use a particular policy.Insurance underwriting is how an insurance company evaluates its risk. It helps an insurance company decide whether taking a chance on providing coverage to a person or business would be profitable.An insurance underwriter will step in to review a policy if conditions change and your coverage needs to be re-evaluated.Underwriters may work with agents or brokers to create a policy that works for you without being too risky for the company.Underwriting is thus in the nature of an insurance against the possibility of inadequate subscription as laid down in Nani Gopal Lahiri v. State of U.P. [1965]

SEBI UNDERWRITING REGULATION

According to SEBI Rules 1993, underwriting means an agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them. Usually the bankers can underwrite upto 10 per cent of the public issue. The Underwriting Commission cannot be paid on the amounts contributed by promoters, directors, employees and business associates. It is an important element of the primary market.

The Underwriter receives a certain amount from the issuer company for performing this work, known as underwriting commission. An Underwriter can be any person, whether a corporate body or just any financial firm. Just an individual may be an underwriter, and there is no barrier to that in the provisions of law. The only prerequisite is for them to be licensed under Regulation 3 of the SEBI Regulations (Underwriters).The only requirement for an underwriter is that he needs adequate financial resources, enabling him to carry out his job efficiently and effectively. According to Regulation 7 of the SEBI (Underwriters) Act, the person’s net worth should not be less than 20 lakhs.

According to Section 2(1)(f) of the SEBI (Underwriters) (Amendment) Regulations,2006, Underwriter means individual engaged in the underwriting business. Underwriting is a standard procedure used in financial, insurance, and investment banking and in various industries. By Regulation 2(fa) of the SEBI (Underwriters) Regulations, the term underwriting has been described as ‘an agreement with or without conditions to subscribe to the securities of a corporation if the existing shareholders of such corporation or the public do not subscribe to the securities offered to them’.The underwriters receive a remuneration from the company that is known as the underwriting commission for performing its part of the contract. This contract is different from a brokerage contract, since a broker does not carry on as many duties as an underwriter.

There are five types of underwriting that are used to assess risks for a variety of important contracts, including:

Loan underwriting.-underwriter is a financial expert who takes a look at your finances and assesses how much risk a lender will take on if they decide to give you a loan.Loan underwriting is the process of a lender determining if a borrower’s loan application is an acceptable risk.

Insurance underwriting.-Insurance underwriters are professionals who evaluate and analyze the risks involved in insuring people and assets.liability insurance is only responsible for the other party’s losses. Your person and your property are unprotected, but liability insurance protects you from being held responsible for the other party’s damages.

Liability Underwriting- A person is insured against any liability arising out of any lawsuit against itself.The risk it covers is the risk of incuring a legal liability in form of a legal claim.

Securities underwriting.-In the financial primary market, securities underwriting is the process by which investment banks raise investment capital from investors on behalf of corporations and governments by issuing securities (such as stocks or bonds). .In order to reduce the risk, they can form a syndicate with other investment banks.

Real estate underwritingFor real estate transactions, underwriters also determine whether the property’s sale price meets its appraised value.

Forensic underwriting.-As a forensic underwriter, your job is to help determine what went wrong with a loan or mortgage. In this role, you may evaluate a failed risk assessment, investigate fraud, and make recommendations to help improve the underwriting process.

Apart from these there are other few types of underwriting:

Pure Underwriting/Conditional Underwriting-Under this type of underwriting, underwriters undertake to subscribe for shares to a certain limit only when the offer which is made to the public is not fully subscribed for, i.e., the balance of shares to be taken over by them.

Equity underwriting-also referred to as security underwriting, is referred to as the process where investment banks work in order to raise investment from investors on the behalf of corporations as well as governments that are issuing these securities.

Soft underwriting – It is when an underwriter agrees to buy the shares at stage after the issue is closed. The risk faced by the underwriter as such is reduced to a small window of time.

CONCLUSION

One very significant aspect of the many tasks an underwriter performs is that he plays the role of a market-maker. This manages a large portion of the volume of trading within the first few days after the stocks start trading.The rules and regulations issued by the Companies Act and the SEBI ensure smooth functioning of works done by underwriters. Underwriting ensures success of the proposed issue of shares since it provides an insurance against the risk.It enables a company to get the required minimum subscription. Even if the public fail to subscribe, the underwriters will fulfill their commitments.The reputation of the underwriter acts as a confidence to investors. The underwriters who are called the lead managers provide financial recognition to the company, whose shares are issued to the public. Thus, the reputation of the issuing company also improves because of the reputation of underwriters.

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

If you are interested in participating in the same, do let me know.

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In the year 2021, we wrote about 1000 Inspirational Women In India, in the year 2022, we would be featuring 5000 Start Up Stories.

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