Underwriting
Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
Underwriting means taking on someone else's risk for a fee. The word has two meanings:
- In capital markets: an investment bank promises, for a fee, to buy any part of a share or bond issue that investors do not take up. This makes sure the issuer raises the full amount.
- In insurance: the insurer studies how risky a person or property is. It then decides whether to give cover and at what premium, the price paid for the insurance.
Example
A company plans an Rs 1,000 crore share issue, and investors buy only Rs 900 crore. The underwriting bank must buy the remaining Rs 100 crore. In insurance, an underwriter may charge a higher health-insurance premium to a person with a history of illness.
Don't confuse with
- Green shoe option: this lets the issuer allot up to 15% extra shares to keep the price steady after listing. Underwriting guarantees that unsold shares are bought.
Related concepts
- Primary market
- Initial Public Offering
- Red herring prospectus
- Book building
- Anchor investor
- Qualified Institutional Buyer
- Application Supported by Blocked Amount
- Green shoe option
- Grey market premium
- Follow-on Public Offer