Definition of Underwriter?
The underwriter is an individual or an institution who undertakes the risk associated with a venture, an investment, or a loan in lieu of a premium. Underwriters are found in banking, insurance, and stock markets.
Underwriting is one of the most important functions in the financial world wherein an individual or an institution undertakes the risk associated with a venture, an investment, or a loan in lieu of a premium.
Roles of an underwriter
The underwriter is considered part and parcel of the financial world. The roles of underwriters in the different sectors are stated below:
The underwriter in insurance:
In this situation, the underwriter determines whether an insurance agency should undertake the risk of insuring a client. They determine the risk and exposure of clients, and also how much insurance should be granted to a client, how much they should pay for it, and whether or not to offer an insurance policy to the client in the first place.
Underwriting in the stock market:
In the case of handling securities, the underwriter determines the risk and price of a particular security. It is a process mostly seen in initial public offerings, wherein investment banks first buy or underwrite the securities of the issuing entity and will sell in the market. The issuer of the security can raise required capital through this process and the underwriters will get a premium in return for the service.
Investors benefit a lot from the underwriting process as the information provided by an underwriting agency can help them make a more informed buying decision.
Underwriting in banking:
Underwriter performs a critical appraisal of the creditworthiness of a potential customer and whether or not a loan can be raised to the customer. They mainly appraise the credit history of the customer through their past financial record, statements, and the value of collaterals provided.
Accounting Treatment of underwriting commission
Accounting Treatment relating to Underwriting of Shares or Debentures :
a) When the shares or debentures are allotted to the underwriters in respect of their liability:
| Underwriter A/c | with the value of the shares or debentures underwriter taken |
| To, Share Capital A/c To, Debenture A/c | Up by the underwriter |
(b) When the shares or debentures are allotted to the underwriters in respect of their liability:
| Underwriters Commission A/c | Debit | with the commission due on the issue price of the shares under-written |
| Underwriters A/c | Credit | |
(c) When the net amount due from the underwriters on the shares or debentures taken up by them is received:
| Bank A/c | Debit | With the net amount due |
| underwriters A/c | Credit |
Conclusion
Underwriting is an act of undertaking the guarantee by an underwriter of buying the shares or debentures placed before the public in the event of non-subscription. According to SEBI Rules 1993, underwriting means an agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them. “underwriter” means a person who engages in the business of underwriting of an issue of securities of a body corporate.
If the shares are over purchased the fees will be paid if it’s under purchased it will purchase by the underwriter for the fees and he will sell it into the market as the terms and conditions that they agreed with the exchange and the issuer