1. Introduction: Public company collects its share capital by inviting public at large by issuing prospectus. As per the Companies Act 2013, A company can not get the certificate of commencement of business. If the amount of minimum Subscription is not received within 30 days from the date of issuing prospectus. As a result all the efforts and the hard work done by the promoters gets fail. In order to avoid such uncertainty the promoters enters in to share underwriting contract.
2. Meaning of share underwriting contract : Share underwriting contract is such contract whereby the brokers in consideration of the commission give guarantee the company to the effect that in case the securities issued for the public at large are not fully purchased by the public they would make payment thereof . The person who gives this type of guarantee is called under writer broker. The amount to be paid to the underwriter Brokers for the shares purchased is called underwriting commission.
3. Advantages of Share underwriting contract : Following are the advantages of share underwriting contract:
(1) Removes uncertainty : After having entered in to underwriting contract there is no uncertainty among the promoters of the company to get the amount of Minimum Subscription.
(2) Appropriate advice The under writer Brokers being experts of share market give appropriate advice to the company. This leads to increase in the confidence of investors.
(3) Safety of Investor’s money: Before taking liability the underwriter Brokers make necessary investigation about the condition and future of the company and thereafter enter in to underwriter contract. Therefore the investors are confident about the safety of their money.
(4) Advantage of goodwill of underwriter Brokers : When the company makes underwriting contract with reputed underwriter Brokers. Company receives benefit of their reputation. Investors are attracted to invest their money reading the names of reputed underwriter brokers in the prospectus.
(5) Reduce advertisement expenditure : If the company does not enter in to the contract of share underwriting, it will have to give more advertisement in the Newspapers and television which is very costly, As the share underwriter takes the responsibility as per the contract, there is less expenditure for advertisement.
4. Conclusion : Underwriting contract is very effective tool for the newly established company. To avoid the risk of commencement of business, it gives surety of Minimum Subscription which leads to increase confidence in investors. Thus, r&an say that the amount paid as underwriting commission reduce the chance of failure to the promoters.