Another important intermediary in the new issue/primary market is the underwriters to issues of capital who agree to take up securities which are not fully subscribed. They make a commitment to get the issue subscribed either by others or by themselves. Though underwriting is not mandatory after April 1995, its organization is an important element of the primary market. Underwriters are appointed by the issuing companies in consultation with the lead managers/merchant bankers to the issues. A statement to the effect that in the opinion of the lead manager, the underwriters‘ assets are adequat the prospectus.
To act as underwriter, a certificate of registration must be obtained from the SEBI. In granting the certificate of registration, the SEBI considers all matters relevant/relating to the underwriting and in particular, a) the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge the activities b) past experience in underwriting/employment of at least two persons with experience in underwriting c) any person directly/indirectly connected with the applicant is not registered with the SEBI as under or a previous application of any such person has been rejected or any disciplinary action has been taken against such person under the SEBI Act/ rules/regulations, d) capital adequacy requirement of not less than net worth (capital + free reserves) of Rs.20 lakhs; and e) the applicant/director/principal officer/partner has been convicted of offence involving moral turpitude or found gully of any economic offence.
FEE Underwriters had to, for grant or renewal of registration; pay a fee to the SEBI from the date of initial grant of certificate, Rs. 2 lakhs for the first and second years and Rs.1 lakh for the third year. A fee of Rs.20, 000 was payable every year to keep the certificate in force or for its renewal. Since 1999, the registration fee has been raised to Rs.5 lakhs. To keep the registration in force, renewal fee of Rs.2 lakhs every three years from the fourth year from the date of initial registration is payable. Failure to pay the fee would result in the suspension of the certificate of registration.
1 General Obligations and Responsibilities Code of Conduct for Underwriters
An underwriter should:
1. Make all efforts to protect the interests of its clients.
2. Maintain high standards of integrity, dignity and fairness in the conduct of its business.
3. Ensure that it and its personnel will act in an ethical manner in all its dealings with a body corporate making an issue of securities (i.e. the issuer).
4. Endeavour to ensure all professional dealings are affected in a prompt, efficient and effective manner.
5. At all times render high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment.
6. Not make any statement, either oral or written, which would misrepresent (a) the services that the underwriter is capable of performing for its client, or has rendered to any other issuer company; (b) his underwriting commitment.
7. Avoid conflict of interest and make adequate disclosure of his interest.
8. Put in place a mechanism to resolve any conflict of interest situation that may arise in the conduct of its business or where any conflict of interest arises, should take reasonable steps to resolve the same in any equitable manner.
9. Make appropriate disclosure to the client of its possible source or potential in areas of conflict of duties and interest while acting as underwriter which would impair its ability to render fair, objective and unbiased services.
10.Not divulge to other issuer, press or any party any confidential information about its issuer company, which has come to its knowledge and deal in securities of any issuer company without making disclosure to the SEBI as required under these regulations and also to the Board directors of the issuer company.
11. Not discriminate amongst its clients, save and except on ethical and commercial considerations. 12. Ensure that any charge in registration status/any penal action taken by SEBI or any material change in financials which may adversely affect the interests of clients/ investors is promptly informed to the clients and any business remaining outstanding is transferred to another registered person in accordance with any instructions of the affected clients/investors.
13.Maintain an appropriate level of knowledge and competency and abide by the provisions of the SEBI Act, regulations, circulars and guidelines issued by the SEBI. The underwriter should also comply with the award of the Ombudsman under the SEBI (Ombudsman) Regulations, 2003.
14.Ensure that the SEBI is promptly informed about any action, legal proceedings, etc. initiated against it in respect of any material breach or non-compliance by it, of any law, rules, regulations, and directions of the SEBI or of any other regulatory body.
15. Not make any untrue statement or suppress any material fact in any documents, reports, papers or information furnished to the SEBI.
(a) Not render, directly or indirectly any investment advice about any security in the publicly accessible media, whether real-time or non-real-time, unless a disclosure of his interest including its long or short position in the security has been made, while rendering such advice; (b) In case an employee or an underwriter is rendering such advice, the underwriter should ensure that he should disclose his interest, the interest of his dependent family members and that of the employer including their long or short position in the security, while rendering such advice.
17. Not either through its account or their respective accounts or through their associates or family members, relatives or friends indulges in any insider trading.
18.Not indulge in any unfair competition, which is likely to be harmful to the interest of other underwriters carrying on the business of underwriting or likely to place such other underwriters in a disadvantageous position in relation to the underwriter while competing for, or carrying out any assignment.
19. Have internal control procedures and financial and operational capabilities which can be reasonably expected to protect its operations, its clients and other registered entities from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or commissions.
20. Provide adequate freedom and powers to its compliance officer for the effective discharge of his duties.
21. Develop its own internal code of conduct for governing its internal operations and laying down its standards of appropriate conduct for its employees and officers in the carrying out of their duties. Such a code may extend to the maintenance of professional excellence and standards, integrity, confidentiality, objectivity, avoidance of conflict of interest, disclosure of shareholdings and interests, etc.
22. Ensure that good corporate policies and corporate governance is in place.
23. Ensure that any person it employs or appoints to conduct business is fit and proper and otherwise qualified to act in the capacity so employed or appointed (including having relevant professional training or experience).
24. Ensure that it has adequate resources to supervise diligently and does supervise diligently persons employed or appointed by it to conduct business on its behalf.
25. Be responsible for the acts or omissions of its employees and agents in respect to the conduct of its business.
26.Ensure that the senior management, particularly decision makers have access to all relevant information about the business on a timely basis.
16. Not be party to or instrumental for (a) certain of false market, (b) price rigging or manipulation, or; (c) passing of unpublished price sensitive information in respect of securities which are listed and proposed to be listed in any stock exchange to any person or intermediary.
Agreement with Clients
Every underwriter has to enter into an agreement with the issuing company. The agreement, among others, provides for the period during which the agreement is in force, the amount of underwriting obligations, the period within which the underwriter has to be 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.
An underwriter cannot derive any direct or indirect benefit from underwriting the issue other than by the underwriting commission. The maximum obligation under all underwriting agreements of an underwriter cannot exceed twenty times his net worth. Underwriters have to subscribe for securities under the agreement with 45 days of the receipt of intimation from the issuers.
Inspection and Disciplinary Proceedings
The framework of the SEBI’s right to under other records and documents of the underwriters, the procedure for inspection and obligations of the underwriters is broadly on the same pattern as applicable to the lead managers.
Action In Case Of Default
The liability for action in case of default arising out of i. non-compliance with any conditions subject to which registration was granted. ii. contravention of any provision of the SEBI Act/rules/regulations, by an underwriter involves the suspension/cancellation of registration, the effect of suspension/ cancellation are on the lines followed by the SEBI in case of lead managers.