What Is an Underwriting Agreement?
An underwriting agreement is a contract between the issuer company and the underwriter (merchant banker/investment bank) whereby the underwriter agrees to subscribe to the unsubscribed portion of a public issue of securities. If the issue is not fully subscribed by the public: the underwriter must purchase the shortfall (devolvement). Under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR): underwriting of a public issue is MANDATORY if the issue is not fully subscribed. The underwriting agreement forms part of the offer document filed with SEBI.
Key Clauses — Specimen
[Illustrative format]
UNDERWRITING AGREEMENT
Between [Issuer Company Name] (the "Company") AND [Underwriter Name — SEBI-registered Merchant Banker] (the "Underwriter")
1. Issue Details: The Company proposes to make a public issue of [Number] equity shares of Rs. [Face Value] each at a price of Rs. [Issue Price] per share (including premium of Rs. [Amount]) aggregating to Rs. [Total Amount].
2. Underwriting Obligation: The Underwriter hereby agrees to underwrite [Number] equity shares ([X]% of the total issue) on a firm/soft basis. In the event the issue is undersubscribed: the Underwriter shall subscribe to the devolving shares within [X] days of the basis of allotment being finalized.
3. Underwriting Commission: The Company shall pay the Underwriter a commission of [X]% of the total underwriting obligation (Rs. [Amount]). [Note: under Section 40 of the Companies Act: commission shall not exceed 5% of issue price for shares or 2.5% for debentures.] Commission payable within [30] days of allotment.
4. Lead Manager Responsibilities: The Underwriter (being also the Lead Manager) shall: (a) prepare and file the Draft Red Herring Prospectus (DRHP) with SEBI, (b) conduct due diligence on the Company, (c) manage the book-building/fixed price process, (d) coordinate with registrar, bankers, stock exchanges, (e) ensure compliance with SEBI ICDR Regulations.
5. Devolvement: If the issue is undersubscribed: (a) the Underwriter shall subscribe to the devolving shares at the issue price, (b) payment within [X] days of intimation of devolvement, (c) the Underwriter may sub-underwrite (share the risk with other underwriters — with consent). If multiple underwriters: devolvement is shared in the ratio of their respective underwriting obligations.
6. Company's Obligations: (a) provide accurate and complete information for due diligence, (b) obtain all necessary approvals (Board, shareholders, SEBI, stock exchange), (c) not make any material changes to the business during the issue period, (d) indemnify the Underwriter against claims arising from misstatements in the offer document (except misstatements attributable to the Underwriter).
7. Termination: The Underwriter may terminate if: (a) a Material Adverse Change occurs before allotment, (b) the Company's representations are found to be materially false, (c) force majeure makes the issue impractical. On termination: the Company's obligation to pay commission ceases.
SEBI ICDR Requirements
(a) Underwriters must be SEBI-registered merchant bankers or syndicate members. (b) Minimum subscription: the issue must receive minimum 90% subscription (including underwriter's devolvement). (c) If minimum subscription is not achieved (including devolvement): the issue is WITHDRAWN and application money refunded. (d) The underwriting agreement is disclosed in the offer document (DRHP/RHP). (e) Underwriting commission is a permissible expense of the issue — deducted from issue proceeds.
Types of Underwriting
| Type | Description |
|---|---|
| Firm Underwriting | Underwriter commits to BUY the specified shares regardless of subscription |
| Soft Underwriting | Underwriter subscribes ONLY to the unsubscribed portion (devolvement) |
| Syndicate Underwriting | Multiple underwriters share the obligation — led by the Lead Manager |
| Sub-Underwriting | The underwriter transfers part of their risk to sub-underwriters |
Disclaimer: This article is for informational purposes only and does not constitute legal or professional advice. While every effort has been made to ensure accuracy based on the latest laws and amendments, readers should consult a qualified professional before acting on any information provided. For expert assistance, contact us.