Underwriting simply means an arrangement where an underwriter undertakes for an authorized commission, to pay an issuer of securities an amount based on the price of the securities determined at a predetermined date in conjunction with the issuer and the issuing house with a view to resale not as a form of investment.
Hence, underwriting is the process whereby an underwriter buys all or a portion of a security issue from an issuer for eventual distribution to the public.
It is noteworthy that the presence of an underwriter of securities is required when it comes to issuing securities to the general public because so many risks are involved as some securities may or may not be purchased by the public. Thus, the functions of an underwriter cannot be undermined. They are;
- The primary duty of underwriters is to underwrite ( insure ) corporate bonds or stocks issued to the public.
- It is the duty of an underwriter of securities to evaluate and assess risk of a particular security as this process can be so beneficial to an investor.
- An underwriter guarantees payment whenever there is loss or damage by accepting the financial risk.
- An underwriter can decide to underwrite public issues either on a firm, standby or best effort basis.
No person is authorized to perform the functions of an underwriter until duly registered by the commission. Thus, below are the registration requirements to be an underwriter in Nigeria as provided by Rule 88 of the Securities and Exchange Commission Rules and Regulations, 2013;
Where a corporate body not registered as an issuing house intends to be registered as an underwriter, it shall file Form S.E.C. 3 as contained in schedule III to these rules and regulations and shall be accompanied by:-
(a) a minimum of 2 sets of duly completed Form S.E.C. 2 to be filed by the sponsored individuals;
(b) copy of certificate of incorporation certified by the Corporate Affairs Commission Where a copy not certified is filed, the applicant shall present the original copy for sighting by an authorized officer of the Commission;
(c) copy of Memorandum and Articles of Association certified by the Corporate Affairs Commission. which shall among others include power to act as underwriters in the capital market;
(d) a copy of CAC Form containing particulars of the directors certified by the Corporate Affairs Commission.;
(e) sworn undertaking to abide by the Commission’s rules and regulations;
(f) copy of latest audited accounts or audited statement of affairs for companies in operation for less than one (1) year;
(g) profile of the company;
(h) fidelity bond representing 20% of paid-up capital (where underwriter is an insurance company, the fidelity bond shall be issued by another insurance company acceptable to the Commission);
(i) sworn undertaking to keep proper records and render returns;
(j) evidence of minimum paid-up capital of N100 million;
(k) any other document or information required by the Commission from time to time.
- No person may act as underwriter in any public issue of securities unless such a person is registered by the Commission to perform the function.
- The following may be registered as underwriters—
(b) issuing houses;
(c) insurance companies;
(d) any other person as may be determined by the Commission from time to time.
- Every mandate to act as underwriter in a public offer of security must be evidenced in an underwriting agreement. A copy of the mandate letter and underwriting agreement shall be filed with the Commission along with the offer documents.
- Where an issue is sub-underwritten, a sub-underwriting agreement shall be filed with the Commission along with the offer documents for the public offer.
- Where there is more than one underwriter, an agreement regulating the relationship between them shall be filed with the Commission.
- The provisions of these rules shall be read in conjunction with the rules guiding public offer of securities and in particular rules 321 to 323 dealing with amount to be underwritten, underwriting commission and time amount underwritten is made available to the issuer.
Content of underwriting agreement
An underwriting agreement shall contain, among others, the following:
1. Names of the parties to the agreement;
2. Type of underwriting commitment;
3. Authorization clause;
4. The underwriting commission;
5. Responsibility in case of default by an underwriter where there is more than one underwriter;
6. Time of closing of the deal;
7. Covenants and obligations of the parties;
8. Indemnity clause;
9. Conditions for subscription by underwriters;
10. Arbitration and governing laws.
11. Terms and regulations regulating the relationship between underwriters where there is more than one.
The financial intermediary called an Underwriter is an important operator in the financial world as this intermediary is a risk-taker in that the issuance of securities to the public involves competent hands.