Who are Underwriters?

Underwriters are the commission agents who give guarantee to the public limited company that in case public failed to subscribe its shares; they would purchase the rest of the shares.

Thus, the issuing company gets assured that its shares are not going to under subscribed.

First of all, the word “subscribes” means money given by the public in exchange of shares.

Suppose, XLTD wants to expand its business and intent to raise its capital from public by issuing 10000 equity shares @100 each to public but they have doubt whether shares were fully subscribed by the public or not. In case public does not subscribe its shares fully, the company will fail to get its intended money and its plan will not be implemented. To overcome from this worry, the company appoints underwriters who for a commission, takes all the responsibility of issuing shares and being fully subscribed. Now in this case, if public subscribes only 8000 shares, the rest 2000 shares were purchased by the underwriters. Thus, the company got its 8000*100=800000 plus 2000*100=200000 which makes total 1000000. Ofcourse, the company has to pay commission to the underwriters for this guarantee.