As per the guidelines of SEBI, company has to collect Minimum amount of share in order to start the business. Sometimes newly established companies are uncertain about the minimum subscription. So, they enter in to underwriting contract with underwriting Broker.
In the absence of underwriting contract the problems faced by the company are as under:
(i) If the company fails to get minimum SubscripTiOn then the company is not granted certificate of commencement of business.
(ii) Company has to refund the amount of share applications.
(lii) This creates adverse effect on the prestige of company and they loose the confidence of their investors.
Thus, to avoid such risk, newly established company enters in to share underwriting contract.