Types of Underwriting Agreement in India

When a company decides to go public and list its shares on the stock exchange, it needs to raise capital to fund its operations and growth. This is where underwriting comes in. An underwriting agreement is a contract between a company issuing new shares and an underwriter who purchases those shares on behalf of investors. In India, there are three types of underwriting agreements commonly used: firm commitment, best efforts, and standby.

Firm Commitment Underwriting Agreement

In a firm commitment underwriting agreement, the underwriter agrees to purchase all the shares being issued by the company at a predetermined price. The underwriter assumes the risk of being able to sell those shares to investors and guarantees the company a certain amount of capital. This is the most common type of underwriting agreement in India.

Best Efforts Underwriting Agreement

In a best efforts underwriting agreement, the underwriter agrees to use its best efforts to sell the shares to investors, but does not guarantee the full purchase of all the shares being issued. The company bears the risk of not selling all the shares and may have to settle for a lower price. Best efforts underwriting agreements are generally used when selling smaller amounts of shares or when the company`s creditworthiness is not well established.

Standby Underwriting Agreement

A standby underwriting agreement is used when a company is issuing rights or warrants to its existing shareholders. In this case, the underwriter agrees to purchase any unsold rights or warrants, thus guaranteeing the company a certain amount of capital. Standby underwriting agreements are generally used when the company needs to raise capital quickly and efficiently.

Conclusion

Underwriting agreements are an important tool for companies looking to raise capital through the issuance of new shares. The type of underwriting agreement used depends on the company`s risk appetite and the size and nature of the issuance. In India, the most common type of underwriting agreement is firm commitment, but best efforts and standby agreements are also used in certain situations. As a professional, it`s important to understand these types of agreements and be able to accurately convey their meaning to readers.