PLAYING FOR SAFETY

NZ Truth, Issue 1261, 30 January 1930, Page 15

PLAYING FOR SAFETY

What Underwriting Means To Investors In Shares

(By "Fiat Lux.") * In prospectuses of debenture and share issues an announcement is often made that the issue has been underwritten either wholly or m part. As there exists on the part of many investors a doubt as to exactly what underwriting involves and means* the following explanation will be of interest.

THE term underwriting has for many years been principally associated with Marine insurance, the underwriters, of which a great example is Lloyds, contracting to make good loss or damage to a ship or cargo under certain terms and. conditions. In Its connection with shares and debentures, underwriting, 'which may be done by a company, a group of persons, or one individual, usually consists of a contract to take up and pay for such portion of the Issue that is not subscribed by the public. It is va • common practice of Governments and local bodies to get loans underwritten and these transactions are usually carried out by banks or large financial- concerns. < The underwriting of share and debenture Issues of public companies is generally undertaken by banks, financial companies, and underwriting companies specially formed for the purpose. What are the objects and . advantages of underwriting? The Idea of haying an issue underwritten is to enable a concern to go ahead with its scheme with the knowledge that the capital required is assured, and the directors or the proprietors are freed from the worry and trouble of .disposing of the shares or debentures, with the prospective financial burden should the issue not be readily subscribed. A lack of response on the part of investors may mean the wreck of what would otherwise be a successful venture. With the capital assured, plans can be made ahead and definite contracts entered into. There are many advantages therefore m having an issue underwritten. There are various kinds of underwriting contracts, but the one commonly entered Into is an undertaking on the part of the underwriters to take control of the sale of the issue and, failing disposal by a certain date, to subscribe for and pay for the balance of the shares or debentures underwritten. Sometimes the capital Is found by the underwriting concern In advance or at certain Intervals, In which case any public subscriptions go In reduction of the amount advanced. The fee charged by the underwriting concern is usually m the form of a commission at a percentage rate on .the amount of the capital underwritten, but m some cases a' fee of- a set amount is charged m addition to the Commission. It is to the advantage of the underwriting concern to dispose of the issue as promptly as possible, as* if it is left with any balance of an issue, not only is its capital locked up but the ratio of profit on its capital is reduced. Is there any advantage to an investor

m taking up shares or debentures that have been underwritten? The fact that an issue has been underwritten is usually tcran investor's advantage as it indicates firsifly, that the undertaking has been investigated by the underwriters who have sufficient faith m its prospects of success to risk their own capital, and, secondly, that the concern has a better chance of carrying out its proposals according to the programme outlined m the Prospectus. Finally, a word of warning to Intending Investors is necessary. They must assure themselves that the underwriting concern ls one that Is able to carry out its obligations. Cases have occurred m Great Britain and elsewhere during the past year wherein ' companies of limited capital have taken on huge underwriting obligations, with the result that failing adequate response from the public, the.underwriters have been called upon to. fulfil their contract and have been unable to do so. ■ ' Where are, of course, reputable underwriting concerns well able to carry out any obligations entered into, and when a prospectus bears their endorsement the investor can feel much more assured • about his Investment than would be the case otherwise. -.