Gujarat BoardEnglish MediumSTD 11 CommerceSPCCProspectus5 Marks
Question
What is Under-writing Contract in relation to the prospectus?
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Answer
A public company invites the public to buy shares or debentures.
Then the reputation of the company is endangered if the newly established company does not get the amount equal to the minimum payment.
Also the chances of future success are hindered.
A negative situation arises in the stock market regarding the company.
To avoid this risk, the newly formed company enters into warranty agreements with brokers or intermediaries.
In which such brokers assure the company that if the minimum payment is not received, the contracting brokers will buy the security of the remaining amount.
A warranty agreement is an agreement between a companies and a third party that guarantees the company in exchange for a broker commission that if the public does not fully purchase the securities, it will buy the rest of the securities and pay for them.
The commission paid for securities purchased by guaranteed brokers in this way is called guarantee commission.
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