SEBI INTERMEDIARIES - UNDERWRITERS

[Mr. M. GOVINDARAJAN]

Underwriter

Regulation 2(f) defines the term ‘underwriter’ as a person who engages in the business of underwriting of an issue of securities of a body corporate.

Unless and until the minimum subscription specified in the prospectus is raised in the public offering, a company may not assign shares offered in a public issue.  Underwriter comes to the rescue of the issuer company and plays with the associated risks.

Underwriting

Regulation 2(g) defines the term ‘underwriting’ as 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.

Registration

A person who intends to act as an underwriter he has to get a certificate of registration from the Board.  A stock broker or merchant banker who holds a valid certificate of registration under the Stock broker regulations or merchant broker regulations, is not required to get a certificate of registration as an underwriter.

Application

A person who intends to act as an underwriter is to file an application in Form A to the Board.   The non-refundable fee payable along with an application for registration shall be a sum of Rs.25000/-.

Furnishing of information

The Board may require the applicant to furnish further information or clarification regarding matters relevant to underwriting to consider the application for grant of a certificate.  If the Board, on receipt of further information, is of the opinion that the information so furnished is not sufficient to decide on the application and seeking further information through correspondence is likely to delay the matter, it may require the applicant or its principal officer to appear before the Board in order to give an opportunity to the applicant to give further clarifications on the application made.

Consideration of the application

The Board shall, while considering the application, take into the following as to whether the applicant-

• has the necessary infrastructure, like adequate office space, equipments and manpower to effectively discharge his activities;
• has any past experience in the underwriting or has in his employment minimum two persons who had the experience in underwriting;
• or any person, directly or indirectly connected with the applicant has not been granted registration by the Board under the Act.
• fulfils the capital adequacy requirements - shall not be less than the net worth of Rs.20 lakh;
• or any of its director, partner or principal officer is or has at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence;
• is a fit and proper person.

Grant of certificate

If the Board considers that the application is eligible to grant registration then the Board shall give intimation to the applicant.  On receipt of the information the applicant is to pay Rs.13,33,300/- as fees to the Board.  On receipt of the amount the Board will issue certificate of registration in Form B.  The applicant shall pay fee of Rs.5 lakh every 3 years from the sixth year from the date of grant of certificate of registration.

Validity of certificate

The certificate of registration granted under sub-regulation (1) shall be valid unless it is suspended or cancelled by the Board.

Conditions of registration

The certificate of registration granted under these regulations is subject to the following conditions-

• in case there is a change in control  it shall obtain prior approval of the Board for continuing to act as such after the change;
• it shall enter into a valid agreement with the body corporate on whose behalf it is acting as underwriter;
• it shall pay the fees for registration,
• it shall maintain capital adequacy requirements;
•  it shall abide by the regulations made under the Act in respect of the activities carried on by it as underwriter;
• it shall immediately intimate the Board, details of changes that have taken place in the information that was submitted, while seeking registration.

Rejection of application

Any application, which is not complete in all respects and does not conform to the instructions specified in the form, shall be rejected. Before rejecting the application the Board shall given an opportunity to the applicant of being heard within one month from the date of raising objection.  The Board may, on sufficient reasons being shown, extend the time by another one month in order to enable the applicant to comply with the requirements of the Board. The decision shall be communicated by the Board within 30 days of such decision stating therein the grounds on which the application has been rejected.

Any applicant may, being aggrieved by the decision of the Board  apply within a period of 30 days from the date of receipt of such intimation, to the Board for reconsideration of its decision.  The Board shall reconsider its decision and communicate its findings thereon as soon as possible in writing to the applicant.

Suspension of certificate

If an underwriter fails to pay the fees  the Board may suspend the certificate, whereupon the underwriter shall forthwith cease to act as an underwriter.

Code of conduct

The underwriter shall abide by the Code of Conduct mentioned in Schedule III of these regulations.

Agreement with clients

Every underwriter shall enter into an agreement referred to in with each body corporate on whose behalf he is acting as underwriter.   The said agreement shall provide for the following-

•  the period for which the agreement shall be in force;
• the allocation of duties and responsibilities between the underwriter and the client;
•  the amount of underwriting obligations;
•  the period, within which the underwriter has to subscribe to the issue after being intimated by or on behalf of such body corporate;
• the amount of commission or brokerage payable to the underwriter;
•  details of arrangements, if any, made by the underwriter for fulfilling the underwriting obligations.

Responsibilities

The underwriter shall not derive any direct or indirect benefit from underwriting the issue other than the commission or brokerage payable under an agreement for underwriting.  The same  4 shall not exceed 20 times the net worth required..   Every underwriter, in the event of being called upon to subscribe for securities of a body corporate pursuant to an agreement shall subscribe to such securities within 45 days of the receipt of such intimation from such body corporate.

Books of Account

Every underwriter shall keep and maintain the following books of account and documents, -

•  in relation to underwriter being a body corporate-

• a copy of the balance sheet and profit and loss account as specified in Companies Act, 2013;
•  a copy of the auditor’s report;

•  in relation to an underwriter not being a body corporate-

• records in respect of all sums of money received and expended by them and the matters in respect of which the receipt and expenditure take place; and
• their assets and liabilities.

Every  underwriter shall, within 6 months from  the close of each financial year furnish to the Board, if so required, copies of the balance sheet, profit and loss account, statement of capital adequacy requirement and such other documents as may be required by the Board,

In addition to the above the underwriter shall maintain the following additional documents-

• details of all agreements;
• total amount of securities of each body corporate subscribed to in pursuance of an agreement;
• statement of capital adequacy requirements;
• such other records as may be specified by the Board for underwriting.

The underwriter shall intimate the Board the place where the books of account, records and documents are maintained.  The above said documents shall be preserved for a minimum period of 5 years.

Compliance officer

Every underwriter shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc., issued by the Board or the Central Government and for redressal of investors’ grievances.  The compliance officer shall immediately and independently report to the Board any non-compliance observed by him.

Powers of the Board

 The Board may at any time call for any information from an underwriter with respect to any matter relating to underwriting business.  The underwriter shall furnish such information to the Board.

The Board is having power to inspect the books of account, document etc.   For this purpose the Board may appoint one or more persons as Inspecting Authority.  Before undertaking an inspection the Board shall give the writer a reasonable notice to the underwriter.  The Inspecting Authority shall undertake the inspection of the documents of the underwriter.  For this the underwriter has to give full cooperation to the Inspecting Authority and give all assistances to the Inspecting Authority.  The inspecting authority shall, as soon as may be possible, submit an inspection report to the Board.  The Board or the Chairman shall after consideration of inspection or investigation report takes such action as the Board or Chairman may deem fit.

Auditor

The Board may appoint a qualified auditor to investigate into the books of account or the affairs of the underwriter. 

Liability in case of default

An underwriter who contravenes any of the provisions of the Act, Rules or Regulations framed there under shall be liable for one or more actions specified therein.  The certificate of registration may be suspended or cancelled. 

In ALMONDZ GLOBAL SECURITIES LTD. AND ORS. VERSUS SECURITIES AND EXCHANGE BOARD OF INDIA - 2016 (5) TMI 1596 - SECURITIES APPELLATE TRIBUNAL, MUMBAI the Tribunal  noted that the degree of due diligence to be performed by the underwriter should be that of a fair person.  An underwriter cannot be asked to act as an investigative entity.  Nevertheless the Court acknowledged that the underwriter would have had to go through the company’s own bank statements and not only rely on the statutory auditor’s report and the company’s statement.  The Court, therefore, cancelled the underwriters’ registration certificate and barred them from taking up a new assignment or taking part in a new issue because they failed to carry out proper due diligence regarding the company’s bank statements and the disclosure of the related parties.