Underwriting arrangements for securities offerings in India

Underwriting arrangements

What types of underwriting arrangements are commonly used?

Typically, underwriting arrangements require underwriting only to the extent of the completion of the bids procured by the underwriters from investors. Further, underwriters may not be required to underwrite certain types of obligations such as obligations that arise from negligence of ‘self-certified syndicate banks’, in the case of ASBA bids.

What does the underwriting agreement typically provide with respect to indemnity, force majeure clauses, success fees and overallotment options?

Typically, indemnity provisions in underwriting agreements relate to the obligation of issuer companies to indemnify the lead managers for any untrue statement in the offer documents or any breach of the representations and warranties provided by the issuer in the underwriting agreement. The liability of lead managers to indemnify issuer companies, if any, is limited to the extent of their details and particulars specified in the offer document.

Force majeure clauses pertaining to the volatility of the stock markets and general economic and financial conditions grant the lead managers the right to terminate the underwriting agreement with reasonable notice being provided to the issuer company. Remuneration details, including success fees, if any, are usually captured in separate engagement letters negotiated between the issuer company and each of the lead managers.

Overallotment options, or green shoe options, are permitted under the ICDR Regulations, granting the option of allotting securities in excess of the securities offered in the public issue as a post-listing price stabilising mechanism. However, issuer companies rarely resort to green shoe options in public issues in India.

What additional regulations apply to underwriting arrangements?

In the event that an issuer making an IPO, on the main board of a stock exchange, does not meet certain conditions specified in the ICDR Regulations, it is required to allot at least 75 per cent of the issue to QIBs. Under the ICDR Regulations, allotment to QIBs in such a case cannot be underwritten. Further, a rights issue can be underwritten only to the extent of the entitlement of shareholders other than the promoters and promoter group. The provisions relating to underwriting under the ICDR Regulations are not applicable to listing on the ITP made without a public issue.

Under the new ICDR Regulations, the underwriting obligations can be limited to the extent of minimum subscription required for the issue. In case of a pure fresh issue or a combination of a fresh issue and an offer for sale, underwriting will be to the extent of 90 per cent of the fresh issue portion, subject to the dilution complying with minimum float requirements. In the case of a pure offer for sale, it will be for such number of shares as is required to meet the minimum public float requirement.

In addition, the SEBI (Underwriters) Regulations 1993 (the Underwriters Regulations) lay down conditions relating to the registration process for underwriters, their duties and obligations towards fulfilling underwriting commitments, and some of the clauses that underwriting agreements must contain. The Underwriters Regulations also grant extensive powers to the SEBI to oversee the underwriting process, including powers to inspect the books of accounts, records and documentation of an underwriter and powers to appoint auditors to audit the books of underwriters, if deemed necessary.