Question

As an investment banker, you have to underwrite a security offering. How would you carry on the procedures? How would your working criteria be different when you would be engaged in the best-efforts offering? As an investor banker which method do you think is more beneficial?

Answer 1

There are three types of underwriting shares, named as Complete underwriting, partial underwriting and Firm Underwriting.

As an investment banker, after considering the various aspects, I would choose for Firm Underwriting. Firm Underwring refers to a definite commitment by the underwriter to take up specified number of shares or securities. of company, no matter how much shares or other securities subscribed by the public. In such method, undderwriters are responsible for the agreed number of shares or other securities in addition to unsu.bscribed shares.

While computing the liability of underwriter, the firm underwriting can be dealt in a way specified below, in absence of specific instructions.

1) When firm underwriting is treated at par with marked applications:

Statement of Liability of Underwriters

Gross Liability (agreed ratio)

Less: Marked Applications includinf firm underwriting

Balance Left

Less: Unmarked application (ratio of gross liability)

Net Liability

Add: Firm Underwriting

Total Liability

If there are more than one underwriters, then the benefit will be shared by all underwriters may be treated at par with unmarked applications.