What is subscription? How is the subscription process?

• How is the subscription process done?
• What should the subscription notice include?
• How is subscription different from IPO?

What is underwriting and how is its process? Underwriting, as one of the most important concepts of the capital market, means the process of buying securities from the issuer or his legal representative and paying or committing to pay the full amount according to the contract. The concept of underwriting is mostly very close to the concept of initial offering in the capital market. In order to fully familiarize yourself with these concepts, we suggest you read the stock market training article on Rahvard website.

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What is the definition of underwriting?

Underwriting is defined in the Dehkhoda dictionary as follows: writing and signing a document to commit to do something. With the same definition, it can be said: Underwriting is the commitment to do something that a person announces to others by signing the document. From the point of view of commercial law, underwriting is a process during which, when establishing a company, investors buy the company’s securities from the issuer or its legal representative and undertake to provide part of the company’s capital.

Underwriting has two basic principles, which are: 1- declaration of commitment through signature 2- payment of money. Stock companies licensed to operate on the stock exchange, in the stage of providing initial capital, can provide part of their financial resources through underwriting. This will help pave the way for the establishment of the company and people who want to become investors. Through underwriting, besides the founders of the company, other people also undertake to provide the financial resources of the company to the extent of the commitment they have signed.

What are the methods of subscription?

Subscription is done in two ways, which are:

1. Underwriting by underwriting commitment method

In this method, a person is introduced as a pledge. This person’s duty is to buy the rest from the publisher or his legal representative if all the securities are not sold within the registration deadline. The obligor is a person separate from the investor and the buyer, who is also called a broker.

At first, the broker examines the company’s stock price and determines the value of each share. Then, the company introduces the applicant for public offering. The broker must make a commitment to the stock exchange organization by registering the document, if all the bonds are not sold, he will provide the amount and buy all the remaining shares.

Advantages of the underwriting method

• Determining the real price of shares due to expertise
• Preventing false price speculation
• Reducing investment risk
• Complete elimination of intermediaries

2. Best effort underwriting

In best effort underwriting, the party or the capital providing company has no obligation to buy unsold bonds. Rather, he does his best to sell the bonds. In this method, not all securities may necessarily be sold.

What is the deadline for subscription?

The stock exchange organization determines the deadline for subscription, and this deadline is usually not more than 30 days. However, if the founders and issuers of the bonds want to extend the subscription period, they must provide justified reasons to the stock exchange organization, and in both stages, the results of the distribution and sale of the bonds should be reported to the organization.

The reason for this deadline is to protect investors. With this method, funds do not stay in the bank and immediately after completing the public offering process, the use of funds received by the organization is unimpeded. In the event that the public offering process is not completed, the funds received must be returned to the investors within 15 days.

How is the subscription process?

The subscription process is done in two stages:

• Draft subscription notice
• How to subscribe

Draft subscription notice

First, the subscription plan must be prepared and signed by all the founders of the company. Then, the plan must be submitted to the Companies Registration Office along with the company’s declaration and articles of association. In the registry office, the plan is checked and the documents are adapted to the commercial law. If this step is passed, the permission to publish the plan of the company’s subscription notice will be issued. After the license is issued, the announcement is made known to the general public by mentioning the subscription method, the required documents and the introduction of the bank through widely circulated newspapers.

What should the subscription notice include?

• Name and type of activity of the applicant company
• Central branch address (if the company has other branches as well)
• Duration of company registration
• Identity information, records, a brief entry of experience and education of the founders
• The exact amount of the company’s capital, both cash and non-cash (for non-cash capital, a quantitative and qualitative description should be made so that the value of the non-cash capital can be well determined)
• If considering the benefits for the founders, its quantity and quality should be explained precisely.
• Declaring the amount of founders’ capital, both committed and paid
• Mentioning the expenses spent by the founders up to that moment
• If the type of activity of the company requires a license from a specific authority, the specifications of that license must be mentioned.
• Announcing the minimum number of subscription shares and the minimum amount to be paid in the first stage (should not be less than 35% of the committed amount)
• Announcement of bank details and account number
• Determination of subscription deadline
• Announcing the submission of the declaration and the articles of association to the company registration office (the general public can read the articles of association and the declaration by visiting this office)
• Mention the name of the widely circulated newspaper that publishes advertisements and notices related to the company.
• How to allocate company securities to underwriters

For example, the subscription announcement of Esteghlal Sports Club published in the official newspaper.

How to subscribe

After signing the share commitment sheet, the underwriter must deposit an amount to the declared account number and receive a receipt. It is not necessary to pay the whole amount at once. But his payment should not be less than 35% of the committed amount. The share pledge sheet contains two copies. One copy with the bank’s receipt and seal is submitted to the underwriter after signing, and the other copy remains with the bank.

Number and characteristics of underwriters

The board of directors of public companies must consist of at least 5 people. But in the law, there is no maximum for the number of partners and shareholders can be several thousand people and there is no limit in this regard. Considering that underwriting is not considered a commercial practice, a newly established company can also participate in this process, and it does not matter whether a natural person does this work or a legal entity. Individuals do not need business rights to subscribe.

What is the share commitment sheet and what does it include?

The share pledge sheet contains two copies. One copy with the receipt and bank stamp is submitted to the underwriter after signing, and the other copy remains with the bank.

The underwriting commitment sheet contains the following information:

• Subject and activity of the company along with registration information
• The number and date of issuance of permission to publish subscriptions from the authority
• The number of shares pledged by the underwriter
• Amount payable at the time of subscription
• Identity information of the underwriter
• Bank information and account number
• How to pay the remaining amount according to the provisions of the statute by the underwriter

What are the steps after completing the subscription?

After completing the subscription, it is necessary to go through the following 4 steps:

Obtaining the necessary permits to establish the company

At this stage, the company is not yet established and needs to obtain permits from relevant authorities to start its work. After completing the subscription, founders must obtain these licenses.

Invitation to underwriters to participate in the general meeting

The founders of the company invite the underwriters to participate in the general assembly by placing an advertisement in the widely circulated newspaper that they have introduced in the subscription plan. Considering that the founders provide at least 20% of the company’s shares, if the number of attendees does not reach the quorum (half of the shareholders) in the first meeting, the meeting will not be held.

The founders must repeat the process of announcing the invitation to the assembly and explain why the first meeting was not held. In the second meeting, the presence of one-third of the shareholders is mandatory, and if the number of those present in the meeting does not reach the quorum this time, the founders must stop the establishment of the company.

Forming a general assembly and approving the company’s statutes and plans

In the general meeting, all the shares of the company are subscribed and the amounts are paid. Inspectors and managers of the company are elected in this assembly through voting. Also, a widely circulated newspaper is selected to record the company’s advertisements. The company’s plans and statutes are reviewed and finally, all items are voted on. Each item will be approved by obtaining two-thirds of the votes present in the assembly.

establish a company

Finally, after going through the mentioned steps, the company is established.

How is public subscription of unused preemptive rights?

For many investors, the question arises as to how they should buy preemptive shares. Others have bought the pre-emptive stock without knowing that it cannot be sold, and after buying it, they don’t know what to do with it. For this reason, we will first define the right of way and the right of way not used.

Definition of right of way and right of way not used

Right of Preemption :  In order to protect the interests of the company’s current shareholders, a law has been established that according to the commercial law, if a company increases its capital by bringing in cash and spending on shares, new shares will be issued for sale. The current shareholders have priority in buying these new shares, which is called priority in buying shares over new shareholders.

Unused right of pre-emption :  If a person does not complete the company’s form in the capital increase and does not sell his right of pre-emption within the specified period, this right of pre-emption is called unused right of pre-emption. The company sells the unused right of pre-emption through auctions and advertisements, and He deducts the sales fee from that amount and deposits the remainder to the shareholders’ account.

How to subscribe unused pre-emption rights?

The market supervisor determines a day or days during which the unused right of pre-emption can be publicly sold, and during this period, the symbol of the right of pre-emption is open. In order to buy the unused right of way in the auction, in addition to the price of the right of way, you must pay 100 Tomans at the time of purchase. People who use the online system to buy and sell shares, when buying, the price of the right of first refusal will be automatically calculated and deducted from their account along with a deposit of 100 Tomans.

In other words, when you buy a number of pre-emptive rights auctioned at a price of 60 Tomans, for example, the trading system deducts 160 Tomans for each pre-emptive right from your account and enters the purchase order into the trading system. Also, during the auction period, when the right of pre-emption is purchased, it is not possible to sell it again and you have to wait until it is converted into a share after registering the capital increase. Those who order the purchase of unused right of way to the broker, in addition to the price of the right of way, must have a deposit of 100 Tomans in their account with the broker in order to make the purchase.

Years ago, when there was no online trading system and automatic mechanism for deducting 100 Tomans from deposits, there were cases where a person would buy an unused right of way through a broker; But he could not pay the 100 tomans deposit on the appointed date, which was the end of the auction period, and as a result, he caused problems for the brokerage. But for several years, 100 Tomans deposit is meant to be received and deposited into the account on the same day and at the moment of purchase.

What is the difference between subscription and IPO?

IPO and underwriting are two different concepts that are often confused by people new to the stock market. Considering that the choice of each of these two methods puts a different economic path in front of the shareholders, it is necessary to examine their differences.

Initial offering means that a company has introduced its shares to the market for the first time, and this does not mean that the company is newly established. Most companies enter 5 to 10 percent of their shares in the stock market and they will have a profit of about 30 to 100 percent.

The initial offering for companies will bring benefits such as funding for capital attraction, financial transparency and the company’s reputation. In the initial supply, the book building method is used to register the order. In this method, priority is given to the one with the highest price, not the one who placed the order earlier.

But the difference between initial supply and underwriting is:

Order price:  In underwriting, the share price is fixed and clear (1000 Rials per share). But in the initial supply, a price range is defined and applicants register their order within this range.

Type of company activity:  In underwriting, the company is being established and the founders are attracting initial capital. But in the initial offering, the company has already been established and has been operating, and its shares have only been offered for the first time on the stock exchange or over-the-counter.

Order registration deadline:  In the subscription, the order registration deadline is 1 month, but in the initial offering, it is 1 trading day.

Opening of the symbol:  Underwriting is a process before the establishment of the company, and the opening of the symbol after that depends on obtaining the necessary permits for the establishment of the company, and obtaining these permits may take several months. While the initial supply symbol is reopened at the beginning of the next trading day.

Conclusion

Underwriting is a measure to provide initial capital for new and start-up joint stock companies. With the presence and commitment of the underwriter in the capital market, the strength and presence of these companies will be guaranteed to a large extent. By participating in the underwriting process, people invest in a company that is not yet established; For this reason, several months may pass until the end of the subscription and establishment of the company. Therefore, keep in mind that this is a long-term investment and requires patience.