In this article, we will describe about the Underwriting of Shares and Debentures. We explain three financial terms, which are mostly used in this article.
The three Financial terms are as Follows
Now, let’s have a look at the meaning of Shares, Debentures and Underwriting
Shares are a unit of ownership in an organisation or corporation. They are a part of the company capitals. Those individuals, who are getting shares from any company, are called “Shareholders”. When a company wants to borrow and increase their capital, they issue their shares in the market for their investors. However, companies also require refunding the amount from their Net Profit. Therefore, shares play a significant role in the lives of companies and investors / shareholders.
Debenture is an instrument which is used by the corporations and government for getting a loan from public and it is given under the company’s Stamp Act. Corporations and Government can secure their debentures on company assets and they issue these as long term loans. In debentures, companies are required to announce the fixed return at the time of issuing. Therefore, holders knows that, how much amount they will get in future by issuer. Debentures have various advantages for holders and issuer.
Holders get an advantage of freely transferable and a fixed amount. It implies that, holders knows that how much amount they will get in future, therefore, they do not takes any worry about their payment and in general, debentures are freely transferable by their holder to others. Therefore, holders have a right to transfer their shares to anyone before their redemption.
However, the disadvantages are that the holders of debentures do not have any voting rights and on the other hand, an interest, which is given by company, is charged against their profits.
Underwriting refers to a guarantee, which is given by a large financial service provider i.e. Banks, Insurance companies, etc., to issuer for receiving a certain minimum amount of cash by their investment in purchasing new securities. Therefore, these financial institutions purchase a lot of securities in price set from a corporation and to the public, this is known as “Underwriting”. In the process of underwriting, the large financial service providers are also known as “Underwriter”.
The amount of compensation is the difference between the sold price and price paid to companies for securities. The entire process can be done through negotiations between the underwriters and issuing company ( it is also called Negotiating underwriting). Underwriters will get an amount while they purchase their securities at the lowest negotiated price.
Well, after discussing about these three terms, we have to make sure that now you have an idea about the meaning of underwriting of shares and debentures.
Underwriting of shares and debentures is a contract, which is made between the company and underwriters. Underwrites promise to company for selling all their securities to public and if any security will be unsold, then they will buy it. For selling his securities, underwriters charge a commission to companies which is also known as “Underwriting Commission”.