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What is an Underwriting Share of a Company?

Underwriting is an agreement entered into before the shares have been purchased by the public , if the public is not taking all the shares, in such event the underwriter will apply for the allotment of the remaining shares for which the public has not applied. The person who takes the responsibility of underwriting a public issue of share is called an underwriter. They provide guarantee to the company to issue the agreed number of shares to the public ,if the issue of shares not applied by the public, underwriter shall be held liable to maintain the balance of share. They act as the intermediary between the issuers and the investor and minimises the risk of financial loss to the company.

Why Needed ?

A company may face certain uncertainty while going for an IPO ( Initial Public offering) whether its shares will be subscribed by the public in whole or not. So, in order to minimise this risk they take assistance from the underwriters who have a specialization in such events. As per the SEBI guidelines if the company is not able to collect 90% of the offer amount , then it has to pay to those who have subscribed to the shares. The underwriting process helps to improve the goodwill of the company by purchasing the share of the company directly or indirectly. Hence, they are very much needed to the company because they provide stability in the market.