SEBI Regulations Regarding Underwriting of Shares

Underwriting is a crucial process in the capital markets, where an underwriter guarantees to purchase the unsubscribed shares in a public issue, providing confidence to both companies and investors. In India, the Securities and Exchange Board of India (SEBI) regulates underwriting activities to ensure transparency, fairness, and investor protection. SEBI has laid down specific guidelines under the SEBI (Underwriters) Regulations, 1993, which outline the legal framework for the underwriting of shares.

Here’s a comprehensive breakdown of SEBI regulations governing underwriting:

1. Registration of Underwriters

According to SEBI Regulations Regarding Underwriting, no entity can act as an underwriter without obtaining proper registration. The SEBI (Underwriters) Regulations, 1993, stipulate the following criteria for registration:

• The applicant must be a body corporate with a soundtrack record.
• The applicant should maintain adequate infrastructure, including office space, manpower, and financial resources.
• The entity should fulfil SEBI's net worth criteria, which requires a minimum net worth of ₹20 lakhs.

SEBI periodically reviews the performance of registered underwriters to ensure compliance with its rules and regulations.

2. Role and Responsibilities of Underwriters

Underwriters play a vital role in ensuring that companies can raise the desired capital through their public offerings. Their core responsibilities include:

• Assessment of Risk: The underwriter assesses the company's financial condition, industry, and market sentiment to determine the risk involved in the public issue.
• Guaranteed Subscription: Underwriters assure the company that they will subscribe to the shares that remain unsubscribed by the public.
• Due Diligence: Before accepting an underwriting assignment, they must perform due diligence to verify the issuer’s financial health, business prospects, and compliance with regulatory requirements.

Underwriters are responsible for ensuring that the public issue is adequately subscribed and provides an added layer of security for issuers, minimizing the risk of failure in raising the required capital.

3. Liability of Underwriters

SEBI regulations hold underwriters liable to subscribe to the shares they commit to underwrite if those shares remain unsubscribed by the public. Some key aspects regarding liability include:

• Firm Commitment Underwriting: In this type of underwriting, the underwriter agrees to buy the entire issue or a fixed portion, even if the shares are unsubscribed.
• Standby Commitment: The underwriter commits to buying the shares only if they are not subscribed by the public, acting as a "standby" guarantor.

SEBI ensures that underwriters fulfil their obligations if required to purchase the unsubscribed shares, failing which they could face penalties or regulatory action.

4. Capital Adequacy Norms

To safeguard investors and the market, SEBI has set minimum capital adequacy requirements for underwriters. Underwriters must have a minimum net worth of ₹20 lakhs to be eligible for registration. This ensures that underwriters possess the financial capability to honour their commitments in case of subscription shortfall.

Moreover, underwriters are required to maintain adequate capital to meet potential liabilities. If an underwriter faces financial stress, SEBI can cancel or suspend its registration.

Read Also: Obligations and Responsibilities of SEBI Registered Investment Advisors

5. Code of Conduct

SEBI enforces a strict code of conduct to ensure that underwriters operate in an ethical, transparent, and fair manner. Some of the major principles included in the code are:

• Honesty and Integrity: Underwriters must act with honesty and integrity in all their business dealings.
• Fair Practices: They must not indulge in any act that could lead to market manipulation or unfair practices.
• Transparency: Full disclosure of relevant information about the company and the issue should be provided to investors.
• Conflict of Interest: Underwriters must avoid conflicts of interest and ensure that their interests do not jeopardize the interests of investors or the company.

6. Obligations and Restrictions

SEBI has imposed several obligations and restrictions on underwriters to ensure that they perform their duties effectively:

• Due Diligence: Underwriters must conduct thorough due diligence of the issuing company before agreeing to underwrite the issue. They are required to verify the financial statements and business model of the company to ensure transparency.
• Information Disclosure: They are obligated to provide SEBI and stock exchanges with accurate and timely information about the underwriting commitments and the extent of their liability.
• No Indulgence in Speculative Activities: Underwriters are prohibited from participating in any speculative trading activities that may influence the share price or market sentiments around the issue.

7. Penalties and Enforcement

SEBI has the authority to impose penalties for non-compliance with underwriting regulations. If an underwriter fails to honour its commitment or violates the code of conduct, SEBI can take strict action, including:

• Monetary Penalties: Fines can be levied for non-compliance with regulations.
• Suspension or Cancellation of Registration: SEBI may suspend or cancel the registration of the underwriter, depending on the severity of the violation.
• Public Disclosure: SEBI can make public disclosures regarding the underwriter's breach of regulations, affecting the underwriter's reputation in the market.

8. Disclosure Requirements

Transparency is crucial in the underwriting process. SEBI mandates that underwriters disclose their underwriting commitments in the offer document (such as the prospectus) to inform potential investors about the risks and guarantees involved. This disclosure helps investors understand the financial backing behind the public issue and the role of the underwriter.

Conclusion

SEBI’s regulations governing the underwriting of shares are designed to protect investors and ensure the smooth functioning of the capital markets. By enforcing strict registration requirements, maintaining capital adequacy norms, imposing a code of conduct, and setting clear liabilities, SEBI creates a robust environment for underwriting activities. These regulations provide much-needed stability and confidence in the primary market, ensuring that companies can raise capital efficiently while investors can trust the process.