Devolvement

An underwriter is paid a commission to promise that an issue will not fall short. Devolvement is the moment that promise is called. If the public does not take up the whole issue, the unsubscribed shares "devolve" on the underwriters, and they must bring in the money by subscribing to those shares themselves.

The workbook defines an underwriter's share of devolvement in one bracket: underwriting commitment less procurement — what it promised to cover, minus the applications it actually brought in.

Soft versus hard underwriting (Chapter 4).

• In soft underwriting, the underwriter only has to take up its share of devolvement if public response is insufficient. Its liability arises at a later stage, based on investor response, and its risk is lower.
• In hard (firm) underwriting, the underwriter agrees to buy its commitment at the earliest stage and guarantees a fixed amount to the issuer. Its risk is much higher.

The rules that govern the obligation (Chapter 5).

• Every merchant banker acting as underwriter must have an agreement with the issuer stating, among other things, the amount of underwriting obligation, the period within which it must subscribe after intimation, and the commission or brokerage.
• It may derive no benefit other than the commission or brokerage under that agreement.
• Its total underwriting obligations under all agreements shall not exceed twenty times its net worth at any point.
• When called upon, it must subscribe within 45 days of receiving the intimation.
• In a book-built public issue, the issue is underwritten by the lead manager(s) and syndicate member(s); if a syndicate member fails, the lead manager fulfils the obligation; neither may subscribe to the issue except to meet underwriting obligations.
• In an issue under the QIB route (regulation 6(2)), the 75% of the net offer compulsorily allotted to QIBs cannot be underwritten.

The post-issue duty (Chapters 5 and 6). Where there is devolvement, the lead manager must ensure the notice for devolvement containing the underwriters' obligations is issued within ten days from the date of closure of the issue, and must report to SEBI, in the prescribed format, any underwriter who fails to meet its devolvement.

SME issues (Chapter 8). The IPO must be underwritten for 100% of the offer, and the lead manager must underwrite at least 15% of the issue size on its own account; if an underwriter or nominated investor fails, the lead manager fulfils the obligation.

Devolvement on an underwriter = Underwriting commitment − Procurement

Constraint: Σ underwriting obligations (all agreements) ≤ 20 × net worth

Illustrative figures. A book-built FPO of 1,00,00,000 shares at Rs 200 = Rs 200 crore is underwritten by the lead manager for 60,00,000 shares and by a syndicate member for 40,00,000 shares.

The public took 75% of the issue; the missing 25,00,000 shares are exactly the sum of the two devolvements.

Timeline. The issue closes on 3 March. The lead manager must issue the notice for devolvement by 13 March (ten days). Each underwriter then has 45 days from receiving the intimation to subscribe.

The syndicate member defaults. It does not pay its Rs 30 crore. The lead manager must fulfil that obligation too — its cash call becomes Rs 50 crore — and the defaulting member is reported to SEBI.

Was the lead manager allowed to commit this much? Its commitment on this issue alone is 60,00,000 × Rs 200 = Rs 120 crore, so across all its agreements it needs a net worth of at least Rs 120 crore ÷ 20 = Rs 6 crore — and more if it has other live underwriting.

Chapter 4 (Issue Management – Important Terms) defines hard and soft underwriting and devolvement; Chapter 5 (Issue Management – Process and Underwriting), at 18% the heaviest chapter, has "underwriting obligations" as a learning objective and carries the 20× net worth cap, the 45-day subscription window and the 75% QIB carve-out; Chapter 6 and Chapter 5's post-issue section carry the ten-day devolvement notice; Chapter 8 carries the SME 100% / 15% rule.

A devolvement computation (commitment less procurement) is a natural numerical question; the day counts are natural one-liners.

• Ten days for the notice, 45 days to pay. The first is the lead manager's clock from issue closure; the second is the underwriter's clock from intimation.
• Devolvement is commitment less procurement — not commitment less the underwriter's pro-rata share of the total shortfall.
• Soft underwriting is the lower-risk form. Hard (firm) underwriting commits at the earliest stage.
• The cap is 20 times net worth across all agreements, not per issue.
• The lead manager is the underwriter of last resort when a syndicate member (or, in an SME issue, any underwriter or nominated investor) fails.
• The QIB 75% in a regulation 6(2) issue cannot be underwritten — do not include it in the underwritten amount.
• An underwriter taking up shares under an underwriting agreement is acquiring in the ordinary course of business, which Chapter 7 lists as exempt from the SAST open-offer obligation.