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Strategic Management and Corporate Finance · Role of Intermediaries in Fund Raising

Underwriters and Bankers to an Issue: Roles and Rules

Updated 11 October 2026 · Fact-checked

An underwriter agrees to subscribe to the shares or securities of a public issue that investors leave unsubscribed, for a commission. A banker to an issue collects application money, holds it in escrow, and pays refunds. Both are SEBI-registered intermediaries with defined duties under their regulations.

Understand Underwriters and Bankers to an Issue

A company raising money from the public cannot be sure that investors will buy every share. If the issue falls short, the company may miss its funding target. Underwriting solves this. An underwriter promises, for a fee, to take up the unsold part of the issue.

So an underwriter is a risk-bearer. The company gets certainty of funds. The underwriter earns a commission and takes on the risk of holding securities it did not plan to buy. Underwriters are registered with SEBI and work under the SEBI (Underwriters) Regulations, 1993. Merchant bankers, brokers and other registered entities act as underwriters. Check the current regulations for any recent amendments and for the exact registration categories.

Underwriting can be of different types. In firm underwriting, the underwriter commits to take up a stated number of securities irrespective of public subscription. When its liability on the unsubscribed portion is worked out, the firm quantity is treated as applications received in the underwriter's favour. It is not an extra purchase on top of that liability. In standby underwriting (also called conditional underwriting), no firm purchase is made in advance. The underwriter only agrees to take up whatever remains unsubscribed. Many textbooks also describe syndicate underwriting, where several underwriters share the total commitment, and sub-underwriting, where an underwriter passes part of its risk to others. Each underwriter acts under a written agreement with the issuer, which states the number of securities, commission and the period within which it must act.

The banker to an issue has a different job. It is a SEBI-registered bank that handles the money side. It accepts application money from investors through its collection centres or electronic systems, keeps the funds in a separate account, and sends the amounts to the issuer once allotment is done. It also processes refunds to applicants who did not get an allotment or got fewer securities than they applied for. Bankers to an issue work under the SEBI (Bankers to an Issue) Regulations, 1994. The Self Certified Syndicate Banks (SCSBs) and UPI route have changed how the application money is blocked, but the core duty is the same: safe collection, accurate records and timely refunds.

Remember the difference: the underwriter protects the subscription of the issue, and the banker protects the flow of money. An exam answer usually needs both clearly separated.

Key rules to remember

Underwriting commission
Commission = Rate of commission × Issue price × Number of securities underwritten
Commission is paid on the amount underwritten, not only on the unsubscribed part. Maximum rate is a regulatory or Companies Act limit; check the current text before quoting a figure.
Underwriter's liability (standby/standard case)
Shares to be taken up = Shares underwritten − Shares subscribed by the public against that underwriter's commitment
If the issue is fully subscribed, the underwriter takes up nothing. Liability is never negative.
Net unsubscribed shares
Unsubscribed shares = Shares offered − Shares applied for by the public
Used to compute the shortfall that underwriters must absorb when the shortfall is shared as per the agreement.
Firm underwriting position
Total shares taken = Firm shares + Liability after crediting the firm shares against the commitment
Treat the firm shares as applications received in the underwriter's favour. Liability = Commitment − (Firm shares + Marked applications + Share of unmarked applications), and it is never below zero. Do not add the firm shares again on top of this liability.

How to solve Underwriters and Bankers to an Issue questions

Use this method for any theory or numerical question on underwriters and bankers to an issue.

  1. 1Read the question and identify which party is asked about: underwriter, banker to an issue, or both.
  2. 2State the meaning in one line and name the governing regulations: SEBI (Underwriters) Regulations, 1993 or SEBI (Bankers to an Issue) Regulations, 1994.
  3. 3If the question is about types, define each type and show how it differs, using the firm versus standby (conditional) contrast where relevant.
  4. 4List obligations and duties in short points: written agreement, discharge of obligation within the period, maintaining records, and, for bankers, collection, escrow, transfer and refund.
  5. 5For numerical questions, write down shares offered, shares applied for, underwriting commitments and any firm commitment. Compute unsubscribed shares first.
  6. 6Apply the underwriting agreement terms: share the shortfall as agreed, or let each underwriter take up its own unsubscribed amount after adjusting applications marked in its favour.
  7. 7Compute each underwriter's total liability and the commission.
  8. 8End with a one-line conclusion tying the answer back to the issue's success or the investors' money safety.

Quickest way: Four-part answer frame

When to use it: Use when time is short and the question asks you to explain, describe or discuss underwriters or bankers.

  1. Write meaning and legal basis in two lines.
  2. Give types or functions as bullet points, one line each.
  3. Add obligations or duties as bullets using the words registration, agreement, records, timely action.
  4. Close with one line on why the intermediary matters to issuers or investors.

Common mistakes in Underwriters and Bankers to an Issue

  • Treating underwriters and bankers to an issue as the same intermediary.

    Both appear in the same chapter and both deal with a public issue.

    Fix: Link underwriters with subscription risk and bankers with collection of money and refunds. Write this contrast in your first line.

  • Saying firm underwriting means the underwriter takes the whole issue.

    The word firm suggests a full commitment.

    Fix: Firm underwriting means a fixed number of securities is bought irrespective of public response. It is not necessarily the whole issue.

  • Calculating commission only on unsubscribed shares.

    Students link the underwriter's duty to the shortfall alone.

    Fix: Commission is earned on the amount underwritten. Liability for shares depends on the shortfall.

  • Giving an underwriter a negative liability when the issue is oversubscribed.

    Subtracting applications from the commitment without checking the sign.

    Fix: If applications marked against an underwriter exceed its commitment, its liability is zero. Surplus can be used to adjust others only if the agreement allows.

  • Forgetting the banker's refund and escrow role, or naming the wrong regulation.

    Notes focus on collection and skip the later steps.

    Fix: Always cover collection, holding the money in a separate account, transfer to the issuer after allotment, and refunds. Cite the SEBI (Bankers to an Issue) Regulations, 1994.

Worked examples

Example 1

Ashoka Textiles Ltd offers 10,00,000 equity shares of ₹10 each at par. The public applies for 8,00,000 shares. The issue is underwritten by two underwriters: A for 6,00,000 shares and B for 4,00,000 shares. Applications marked in favour of A are 3,00,000 shares and in favour of B are 1,00,000 shares. The remaining 4,00,000 applications are unmarked. Find the liability of A and B, ignoring any firm underwriting and assuming unmarked applications are shared in the ratio of the underwriting commitments.

Show the solution
  1. Shares offered = 10,00,000. Shares applied = 8,00,000. Unsubscribed shares = 2,00,000.
  2. Marked applications: A 3,00,000 and B 1,00,000. Total marked = 4,00,000. Unmarked = 8,00,000 − 4,00,000 = 4,00,000.
  3. Ratio of commitments = 6,00,000 : 4,00,000 = 3 : 2.
  4. Unmarked shares credited to A = 4,00,000 × 3/5 = 2,40,000. To B = 4,00,000 × 2/5 = 1,60,000.
  5. Total applications credited to A = 3,00,000 + 2,40,000 = 5,40,000. To B = 1,00,000 + 1,60,000 = 2,60,000.
  6. Liability of A = 6,00,000 − 5,40,000 = 60,000 shares. Liability of B = 4,00,000 − 2,60,000 = 1,40,000 shares.
  7. Check: 60,000 + 1,40,000 = 2,00,000, which equals the unsubscribed shares.

Answer: Underwriter A takes up 60,000 shares (₹6,00,000) and underwriter B takes up 1,40,000 shares (₹14,00,000).

Example 2

Explain the role of a banker to an issue in a public issue. State how it differs from the role of an underwriter.

Show the solution
  1. Define: A banker to an issue is a SEBI-registered bank that carries out the work of collecting application money, and the related services, for a public issue under the SEBI (Bankers to an Issue) Regulations, 1994.
  2. Role: It accepts application money from investors, keeps it in a separate account, and sends the funds to the issuer after finalisation of the basis of allotment.
  3. Refund: It processes refunds to applicants who are not allotted securities or are allotted fewer than applied for, within the timelines set by SEBI.
  4. Records and reporting: It keeps accurate records of collections and gives them to the registrar and the lead manager so that allotment and reconciliation are correct.
  5. Difference: The underwriter promises to subscribe to unsubscribed securities for a commission, so it bears the risk of an incomplete issue. The banker handles the money flow and does not take any subscription risk.
  6. Conclude: Both are needed. The underwriter secures subscription and the banker secures safe and timely handling of investor money.

Answer: The banker to an issue collects and holds application money, transfers it to the issuer after allotment and pays refunds. The underwriter instead bears the risk of unsubscribed securities and earns commission for it.

Exam tips

  • Answer in the provision, analysis, conclusion pattern: name the regulation, apply it to the facts given, then state the outcome.
  • Always name both regulations: SEBI (Underwriters) Regulations, 1993 and SEBI (Bankers to an Issue) Regulations, 1994.
  • In numerical questions, show the unsubscribed shares and the marked and unmarked split in separate lines so partial marks are safe.
  • If a question asks about types of underwriting, give a one-line contrast between firm underwriting and standby (conditional) underwriting, and mention syndicate and sub-underwriting briefly.
  • Do not quote a commission percentage or a refund timeline unless you are sure of the current rule; describe the principle instead.

Practice questions from Role of Intermediaries in Fund Raising

Underwriters and Bankers to an Issue in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Underwriters and Bankers to an Issue: frequently asked questions

What is the difference between firm underwriting and standby underwriting?

In firm underwriting, the underwriter commits to take up a stated number of securities regardless of public demand. This firm quantity is treated as applications in its favour when its liability on unsubscribed shares is computed. In standby (conditional) underwriting, there is no advance purchase. The underwriter only takes up what the public leaves unsubscribed.

Which regulations govern underwriters in India?

Underwriters are governed by the SEBI (Underwriters) Regulations, 1993. They cover registration, the written agreement with the issuer, and the obligations of the underwriter. Check the latest amended text before the exam.

What does a banker to an issue do?

A banker to an issue collects application money, holds it in a separate account, transfers it to the issuer after allotment, and pays refunds. It acts under the SEBI (Bankers to an Issue) Regulations, 1994. It must keep proper records and coordinate with the registrar and lead manager.

Does an underwriter always have to buy shares?

No. If the public subscribes the full issue, the underwriter's liability is nil for standby underwriting. It still earns commission for the commitment. In firm underwriting, it buys the firm portion in any case.