QS Study

Underwriter

The public limited company issues shares and debentures in the capital market but the company does not deal the trading with the mass people. These activities are performed through other financial intermediaries. The firms or individuals taking the responsibility of selling shares, debentures, bonds etc. are called underwriter. In the securities industry, an underwriter is a company, usually an investment bank, that helps companies introduce their new securities to the market.

Underwriter examines risk and decides whether or not it can be insured and if it can work out the premium to be changed. Underwriters are either employed by insurance companies or are members of lords. The underwriter is essential for a newly formed company to raise capital. Underwriters charge for commission. They guarantee that if the shares or debentures are not totally sold, they will buy those.

Securities Act 1933: “The term underwriter means any person who has purchased from an issuer.”

Oxford Dictionary of Baseness: “Underwriter means a financial institution, usually an issuing house or merchant bank that guarantees to buy a proportion on any unsold shares when a new issue is offered to the public.”

So, we can say that underwriters are responsible for selling shams and debentures by contract charging commission. Underwriters are very much important for developing industries because they help to collect the initial capital of the company.