Can You Define Underwriting And Its Importance?

Underwriting:Underwriting may be defined as:"A contract made by the promoters with persons like brokers, or institutions like banks, insurance companies, syndicates or security dealers who are willing to take the whole or portion of such of the offered shares as may not be subscribed for by the public. The underwriters make the payment of subscribed shares in full to the company and sell them later on to the general public."

If a public company does not obtain an initial capital from the promoters, financiers, it cannot proceed with the allotment of shares and also cannot get a certificate to commence business. The promoters of the company, therefore, make arrangements for underwriting with sound parties.Importance of underwriting:

1- The underwriters stand guarantee and help of the promoters in undertaking the risk of starting or enlarging a project.
2- When the issue is underwritten, the company is assured of the required capital.
3- The company gets the benefit of specialized knowledge of the underwriters in the marketing of securities.
4- If the underwriters are men of integrity, it raises the status of the company.
5- If the securities are sold in the market, the underwriting syndicate can also be dissolved.
In Pakistan underwriting has not assumed much importance as in developed countries of the world.