What Is Underwriting Of Shares?

The process of underwriting shares is the provision of a guarantee or insurance by an underwriter to a company that its shares, when they are offered to the public, will be subscribed in full.

This means that the money the company wishes to raise by issuing shares is guaranteed to be raised by their action. Of course, this means the underwriter, which can be a specialist in the field, or a financial institution like a bank, must sign a document agreeing that if the shares are not fully subscribed by the market, they the underwriters will subscribe for them themselves, guaranteeing the money is raised, and potentially taking a significant interest in the company themselves if the shares prove less attractive to the market than they predicted.

This means that the underwriter assumes the risk when a share-flotation is launched, and also the responsibility to ensure that the shares are made attractive to potential buyers. In essence, underwriting shares is akin to a statement of confidence in the attractiveness of those shares, backed with the underwriter's own money. The company whose shares are being sold wins, because they are guaranteed the degree of profit they want, while the underwriter, which essentially assumes ownership of the shares and responsibility for selling them, could benefit if the shares are heavily subscribed, as this will push up the share price, and make them a profit on sale.

Underwriting is usually only undertaken when a share issue is first launched, as the mechanics of the operation rather depend on the surprise of the market - in subsequent share issues, the company and the underwriter both have experience of the market reaction to the shares, and can make more sound economic judgments based on that experience.

'Underwriting of shares' means to purchase the issued shares and bonds from the principal company and then to resell the shares to the public. This action is basically performed by the banks and the issuing company gives commission to the bank. After selling the shares to the public the banks get free from any liability. Moreover, underwriting of shares is primarily done when they are first time issued by the company.

Underwriting of Shares: Underwriting refers to purchasing the whole issue of shares or bonds from the principal company and reselling it to the public. By this underwriting the bank receives commission from the issuing company, which becomes free from this painstaking job of selling shares to the public.

The bank also takes the responsibility to sell the new issues with out underwriting them.

Issuing letter of Credit (L/C): Letter of credit is an open letter from a bank requesting the seller to send the goods to the buyer and promises to pay the sum by itself. A L/C is a reliable guarantee for the exporter or seller from the bank. This instrument is used in foreign trade and once it is issued the importer can receive the goods. Banks also issue traveler cheques being a kind of L/C to the tourists and travelers.Locker Services: - Banks offer lockers for the safe custody of jewelry, currency, documents and other precious items.

Receiving deposits: This is a function of formation of capital. Receiving deposits from the account holders forms capital. Small savers, traders, manufacturers and others deposit their money with the bank under the head of savings, current or fixed deposits accounts and earn interest income.