Underwriting got a sudden push after the introduction of free pricing and the easy entry of issues in the primary market. The Indian primary market has experienced tremendous growth in the last few years. Many old and new companies entered with high premium issues for taking advantage of the current positive attitude of Sebi towards the issuers. But, it has made the market very volatile and uncertain. Issuers and lead managers now have doubts about the success of their issues. .

The term `underwriting' is generally read in a narrow sense in India. In the true sense, it means `to accept risk in exchange for a premium'. In the business of investments, it means to assume the risk of buying a new issue of securities from the issuers and reselling it to the public. The underwriter makes a profit on the difference between the price paid to the issuer and the public offering price called underwriting spread. The underwriter, in securities business, is generally an investment banker.

He, singly or as part of a syndicate, agrees to purchase a new issue of securities from an issue, and distributes the same to investors, making a profit on the underwriting spread. But the practice of underwriting is different in India as the underwriter does not buy and sell securities. He gives only guarantee for the subscription of the issue. If the issue fails to get full subscription from the public, the underwriter has to take up the unsubscribed portion. The fee paid is a fixed percentage and it is popularity known as underwriting commission. The underwriting commission is paid to the underwriters for giving assurance for the success of the issue under Section 76 of the Companies Act, 1956. In simple terms, underwriting refers to an agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe the securities offered to them. Underwriting is a legally enforceable agreement which is entered into as per the model underwriting agreement prescribed under Sebi's (Underwriters) Regulation, 1993. It has some features of a contract, e.g., an offer is made by underwriters and acceptance is given by the company at its board meeting to approve the prospectus. Communication of acceptance by the company representative completes the contract, subject to (i) the company fulfilling its part of the agreement; and (ii) right of withdrawal before communication of acceptance of the offered or in case of non fulfillment of condition set out in the agreement anytime before opening of the issue. Only the recognized categories of underwriters can enter into an underwriting agreement.