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

Which statement best describes a 'firm underwriting' arrangement, as distinguished from a standby arrangement?

Firm underwriting means the underwriter commits to subscribe a fixed number of shares irrespective of public response, besides covering any shortfall. In contrast, standby underwriting obliges the underwriter to take up shares only when the issue is undersubscribed, and neither involves price stabilisation or pure advice.

  1. AThe underwriter commits to subscribe a fixed number of shares irrespective of public response, in addition to any shortfall obligationCorrect
  2. BThe underwriter takes up shares only if the issue is undersubscribed
  3. CThe underwriter guarantees the issue price in the secondary market after listing
  4. DThe underwriter only advises on pricing and carries no subscription obligation

Explanation

In firm underwriting the underwriter agrees to buy a specified number of shares regardless of public demand, apart from its obligation on the unsubscribed portion. Option B describes standby/conventional underwriting. Option C describes market making, and option D describes a pure advisory role.

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