Question

b. Unlike private placement of securities, a public offer often requires the use of an underwriter to make the issue succeed. As a young and dynamic Financial Engineer who has just been employed by the Mayfair Company, a leading producer of building materials in the Republic of Benin, advise your CEO on the availability of the various types of underwriting that you know to enable him/her make a good

choice.

Answer 1

Solution :-

The various types of underwriting agreements can be explained as follows:-

1. Firm Underwriting : Under this underwriting, the underwriter takes up a certain number of securities of firm himself. These securities are subscribed by underwriter in addition to his liabilities for securities which remain unsubscribed by public. Under this agreement, underwriter needs to subscribe to agreed number of securities irrespective of public response to company issue that is whether such issue is fully subscribed or oversubscribed.

   In case of oversubscription of securities by public, only underwriter will be allotted such agreed number of securities. Whereas in case of under subscription, he will subscribe to both that is to agreed number of shares as ordinary subscriber and to all unsubscribed shares for which he is liable to subscribe as underwriter

   .
2. Sub- Underwriting : It is an underwriting agreement under which an underwriter appoints other sub-underwriters to safeguard himself. When after underwriting of securities, underwriter feels that it is beyond his capacity to assume the whole risk, then he appoints other underwriters with him to reduce the financial risk associated with underwriting of securities.The sub-underwriter don't directly deal with the customers but is liable only to underwriter for the amount of securities they have underwritten.  Underwriter and sub-underwriters has the relationship as agents and sub-agents
3. Joint Underwriting: Under Joint underwriting ,more than one underwriter appointed by company for underwriting its securities. This type of underwriting is used, when issue is too big and contains large risk. It minimise the burden of sole single underwriter. The firm itself appoints numerous underwriters and all underwriters underwrites to specified amount of securities and in specified ratio.

4. Syndicate Underwriting: Syndicate underwriting is an underwriting agreement in which several underwriters jointly underwrite securities. Such agreement takes place in case of large issue, where a single underwriter cannot underwrite the whole amount. Different underwriters make a syndicate and represent themselves as single underwriter for underwriting securities.

   All the underwriters decide in advance the amount and ratio of securities that they will underwrite. It is different from joint underwriting in which company itself appoints several underwriters, whereas in syndicate underwriting several underwriters joins together themselves for underwriting.

5. Complete Underwriting: Complete underwriting is one in which whole issue of securities of company is underwritten. Under such agreement, underwriter underwrites full amount of securities issued by companies. These securities are underwritten either by single underwriter or by many underwriters who agrees to assume the risk to specified amount.

6. Partial Underwriting: Partial underwriting is one in which only a certain part of issue of securities of company is underwritten. Under such agreement, underwriter underwrites partial amount of security. In partial underwriting, securities are underwritten either by single underwriter or by many underwriters who agrees to assume the risk to specified amount.

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