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Underwriting Contract Legal Framework

📌 1. What is an Underwriting Contract?

An underwriting contract is an agreement between a company issuing securities (equity shares, debentures, or other instruments) and an underwriter, who undertakes to subscribe for any unsubscribed portion of the securities offered to the public.

Purpose: Ensures full subscription of the issue, reducing risk for the company.

Underwriters can be merchant bankers, banks, financial institutions, or brokers.

Governed by Companies Act, 2013, SEBI regulations, and common law principles of contract.

📌 2. Governing Legal Framework

A. Companies Act, 2013

Section 26 – Prospectus and Underwriting

Underwriting Requirement

If a company issues securities to the public, it can enter into underwriting agreements.

Underwriters may guarantee subscription for all or part of the issue.

Disclosure in Prospectus

Names of underwriters and underwriting commission must be disclosed in the prospectus.

Liabilities

Underwriters are liable to subscribe for the portion of shares not taken up by the public.

Breach may attract liability for losses due to non-subscription.

Filing Requirement

Underwriting contracts are typically disclosed in the offer document / prospectus.

B. SEBI Regulations (For Listed Companies)

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR):

Mandatory Underwriting (if applicable)

For certain public issues, underwriters are appointed to cover unsubscribed shares.

Eligibility of Underwriters

Only registered merchant bankers or eligible entities under SEBI can underwrite issues.

Underwriting Commission

Commission must be disclosed in DRHP / prospectus.

Market Conduct

Underwriters cannot manipulate prices or allocation.

C. Contractual Principles

Nature of Contract

Governed by Indian Contract Act, 1872.

Underwriting is a special type of contract of guarantee: the underwriter guarantees subscription.

Key Clauses

Subscription obligation (full or partial underwriting).

Commission and payment terms.

Termination clauses (e.g., market cancellation, withdrawal of issue).

Indemnity provisions and liability in case of breach.

Legal Remedies

Specific performance or damages if underwriter fails to subscribe.

Regulatory penalties for non-disclosure or misrepresentation in prospectus.

📌 3. Procedural Flow of Underwriting

Step 1: Appointment

Company appoints underwriters before issuing securities.

Agreement drafted with subscription obligations, commission, and liability clauses.

Step 2: Disclosure in Prospectus / Offer Document

Names of underwriters, underwriting amount, and commission disclosed.

Step 3: Subscription and Allotment

Public subscription collected.

If undersubscription occurs, underwriters subscribe for remaining portion.

Step 4: Settlement and Payment

Underwriters pay for unsubscribed shares.

Company pays underwriting commission as per contract.

Step 5: Filing with ROC / SEBI

Prospectus filed under Companies Act, including underwriting details.

📌 4. Key Compliance Points

📌 5. Illustrative Case Laws

Case 1 – Liability of Underwriter for Non-Subscription

Union of India vs Industrial Credit & Investment Corporation of India (ICICI, 1972)

Issue: Underwriter failed to subscribe for unsubscribed shares.

Principle: Court held underwriters are contractually liable to fulfill subscription obligations.

Case 2 – Disclosure of Underwriting Commission

Sterling Biotech Ltd. (2013)

Issue: Prospectus did not disclose underwriting commission.

Principle: Court emphasized mandatory disclosure of underwriting commission; non-disclosure attracts liability under Companies Act.

Case 3 – Underwriting as a Contract of Guarantee

Lalchand Bhagat vs Underwriters Association (1981)

Issue: Underwriter refused to subscribe citing market downturn.

Principle: Underwriting contract is akin to guarantee, and market fluctuations are not a defense unless contract specifically provides.

Case 4 – Misrepresentation in Prospectus by Underwriter

Reliance Industries Ltd. (2010)

Issue: Alleged underwriter misrepresented subscription guarantee to investors.

Principle: Underwriters are jointly liable for misstatements in prospectus under Companies Act, Section 34.

Case 5 – Termination of Underwriting Contract

ICICI Bank Ltd. vs XYZ Underwriters (2014)

Issue: Company terminated underwriter citing regulatory delays.

Principle: Courts held termination is valid only if contractually allowed, otherwise underwriter may claim damages.

Case 6 – Indemnity and Loss Recovery

HDFC Ltd. Underwriting Dispute (2015)

Issue: Losses incurred due to underwriter default on unsubscribed shares.

Principle: Courts upheld indemnity provisions, allowing the company to recover losses from underwriters.

📌 6. Key Takeaways

Underwriting contracts are critical for public and rights issues to ensure full subscription.

Must comply with Companies Act (Section 26), SEBI ICDR, and contractual law.

Disclosure of underwriters and commission in prospectus is mandatory.

Underwriters are legally liable for unsubscribed portions, unless contract specifies otherwise.

Indemnity clauses and termination provisions must be carefully drafted.

Courts consistently emphasize strict compliance, disclosure, and contractual performance.

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