LEGAL VIEWPOINT: Underwriters & Public Issues of Shares – By Dr. AbdelGadir Warsama Ghalib, LEGAL COUNSEL, Bahrain

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Dr AbdelGadir Warsama Ghalib, Legal Counsel

Some companies operating in Bahrain are in the process of issuing securities to the public for different reasons. This process requires the presence of some underwriters. Underwriters of securities in all parts of the world play an important role in the development of the markets. I believe that it would be more useful, and in continuation to what I have mentioned earlier, to highlight the role of underwriters with reference to public  issues of shares .

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There are different occasions, and due to either voluntary or involuntary reasons, that lead some public-joint stock companies to decide to issue certain securities to the public-at-large.

Generally speaking, the securities issued to the public-at-large in the markets could either be purchased by the shareholders of the company, in case of shares, or alternatively by debenture holders in case of debentures or bonds.

However, we have to mention at this stage that, issuance of securities as public issue is not an easy job and could not achieve good results. This is simply because the securities may not be taken or purchased by the concerned public.

We have to bear in mind that there is always a market risk, or other risks, associated with the issuance of securities. Based on this risk, or otherwise, the public issue could totally fail and or could not be fully subscribed for any reason.

Success or failure of any public issue depends to a great extent on many factors, such as the financial status of the company at the time of the issue, the future prospects of the company, the reputation, goodwill and know-how of the company and the management of the company, the reasons for public issue, the size of the public issue, the timing of the public issue i.e. at the beginning or end of the year, the general atmosphere of investment at the time of the issue…etc.

Normally when companies take certain steps to issue securities to the public-at-large, and due to many reasons including the above, it is advisable that these companies should opt to look for security underwriters because they will technically assist them in this venture.

Underwriters of securities are specialized companies, merchant or investment banks, investment companies … etc. The primary duty of underwriters is to underwrite (insure) corporate bonds or stocks issued to the public.

In practice, the underwriters companies agree to enter into a contract with the company intending to float public issues of securities. The two contracting parties agree to sell and purchase the entire issue of the bonds or the stocks, if any, at the end of the period designated for their sale to the public.

In other words, this means that the underwriters of securities should wait until the end or lapse of the sale period, and at this end they should be ready to take for themselves the “left-overs” or the unsold portion of the securities.

Sometimes securities issued to the public could be over-subscribed or even not over-subscribed but completely taken immediately and purchased on the spot by eager potential investors. In such instances the underwriting companies should rejoice because definitely they will take their dues or commission at no effort. Interestingly, this reminds us of insurance companies (life, corporate or commercial insurance) because they usually take very high premiums in anticipation of the future risk that could never happen.

However, we have to admit that, in this connection, there is always some sort of risk. Some Central Banks or other Regulatory Authorities, in the region, due to the element of risk associated with this venture instruct licensed banks not to underwrite securities and to keep away from this business under all circumstances even if the company floating the securities is a good customer to the bank.

Underwriters of securities are supposed to assess the risk before entering into the deal agreement, and they should determine their premium or commission according to the gravity of the potential risk they could encounter in the future.

Underwriting of securities, even though, it could be expensive, is very important for public issue of securities because the underwriters will give the necessary support and comfort to concerned companies against instances of non-subscription. Companies do not have to worry because they will or could transfer the risk to another specialized agency or entity licensed for such purposes and activities.

To conclude we could say that, with the assistance of underwriting companies and based on the contractual relationship, the company floating the securities to the public could get the price they are looking for their securities from the underwriting company. This is an advantage…