Registration of Underwriters with SEBI

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Who are underwriters under SEBI act?

An underwriter is any entity or a corporate that evaluates and assumes another entity's risk for a fee, such as a commission, premium, spread or interest. Underwriters operate in many aspects of the financial scenario, including the mortgage industry, insurance industry, equity markets, and common types of debt securities.

They are the risk experts having that appetite to borne the same for a premium offered. Most common type of Underwriters is Mortgage Loan Underwriter.

In today's scenario, it is very much important to underwrite loans so as to ensure risk-free modeling. It is sorts of discipline in itself.

It is very much prevalent in the following financial sectors:

Underwriting in Insurance

In the insurance segment, underwriters determine whether an insurance agency should undertake the risk of insuring a client. They determine the risk and exposure of clients and also how much insurance should be granted to a client, what they should pay for it and whether or not to offer an insurance policy to the client in the first instance.

Underwriting in Stock Market

In the Equity or stock market, underwriting involves determining the risk and price of a particular security. It is a process seen commonly during initial public offerings, wherein investment banks first buy or underwrite the securities of the issuing entity and then sell them in the market. This ensures that the issuers of the security can raise the full amount of capital while earning the underwriters a premium in return for the service.

Investors earn a lot from the underwriting process as the information provided by an underwriting agency can help them take a more informed buying decision. An underwriter who holds a large chunk of the securities of a particular company or is the market maker for such a security provides the core liquidity for the security and enhances price stability and distribution channels.

Underwriting in Banking

Underwriters in the banking sector perform the critical operation of appraising the credit worthiness& soundness of a potential customer and whether or not to offer them a loan. They appraise the credit history of the customer through their past financial record, statements, and value of collaterals provided, among other parameters& then take on informed decision as to whether they are eligible for the loan amount or not.

EXAMPLES: Bajaj Allianz General Insurance Company Ltd., IDBI, IFCI etc.

*Getting a license under Underwriting involves an application to SEBI under Securities Exchange Board of India (Underwriters) Regulations, 1993.

Criteria

  • He should hold a Certificate granted to it by Board.
  • Every Stock Broker or Merchant Banker holding a valid certificate of registration under section 12 of the Act, shall be entitled to Act as an Underwriter without operating a separate license.
  • He should be a Fit & Proper person as defined in Schedule II of SEBI (Intermediaries) Regulations, 2008.
  • Capital Adequacy: 20 Lakhs

Process

An application by an underwriter for grant of a certificate shall be made in Form A accompanied by non-refundable fees.
However, the Board may require the underwriter to submit further information in order to consider the application. It may take the following things as criteria for consideration of the application.

  • Necessary Infrastructure, Office space, equipment’s, manpower.
  • Any Past experience in underwriting or has in employment minimum 2 persons who have such experience.
  • Any such person directly or indirectly connected with applicant has not been granted certificate earlier.
  • Fulfils the Capital Adequacy norms.
  • Is a fit & proper person.

Henceforth, Board on being satisfied by the eligibility of the application, shall send an intimation to applicant & then Grant a Certificate of Registration or a license to Act as an Underwriter in Form B.

*Certificate shall be valid for a period of 5 years.

Conditions for Registration

  • When an underwriter proposes a change in control, it shall obtain prior approval of Board to continue to Act after the change.
  • Shall enter into an agreement with Body Corporate on whose behalf it is acting as such.
  • It shall pay the relevant fees applicable so as to initial/Permanent Registration as specified in Schedule II.
  • It shall maintain Capital Adequacy norms.
  • Every underwriter shall at all times abide by the Code of Conduct as specified in Schedule III.  
  • Underwriter shall not derive any direct or indirect benefit from the issue other than the commission or brokerage payable. 
  • Total underwriting obligations shall not exceed 20 times the net worth.

Significant Points

  • Every Underwriter in the event of being called upon to subscribe for securities of a Body Corporate pursuant to the Agreement executed shall subscribe to such securities within 45 days of receipt of such intimation from such Body corporate.
  • Every Underwriter shall preserve the Books of Accounts & other records for a minimum period of 5 years.
  • Before undertaking an inspection, Board shall give a reasonable notice to the underwriter. After the process of inspection is over, inspecting authority shall possibly submit an inspection report to the Board.

Fees

  • The amount of Non-refundable fees to be paid along with the Application for registration shall be 25000/-
  • Every underwriter shall pay fees of thirteen lakh thirty-three thousand & three hundred rupees at the time of grant of Certificate of initial registration. 
  • If the underwriter wants to renew his term for permanent registration, fees of five lakh rupees shall be paid.

*Also underwriters shall make all the efforts to protect the interests of investors, as prescribed in Schedule III (Code of Conduct for Underwriters) of relevant regulations.

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