underwriting fee
Underwriting fee is the cut a bank or stockbroker takes for guaranteeing that shares or bonds being sold to the public will actually find buyers.
In plain English
"So if nobody buys the shares, the company just loses the money?" Tunde asked, staring at the newspaper announcement of a company going public.
"That is the whole point of the underwriting fee," his sister Bimpe said. "The company does not carry that risk alone. It pays a bank or a group of stockbrokers to promise that the shares will sell, and if they do not all sell, the underwriters are the ones stuck holding what is left."
Think about it like a market woman who agrees to buy every basket of tomatoes a farmer brings, whether or not she finds customers that day, but she charges him a small percentage for taking on that worry. The farmer sleeps well. The market woman prices in her risk.
When a Nigerian company like a mid sized bank or a manufacturer wants to raise money by selling new shares or bonds, it hires investment banks to organise the sale. Those banks do the paperwork, price the offer, market it to investors, and put their own reputation and sometimes their own money on the line by agreeing to buy up whatever is not sold. The underwriting fee is their payment for taking that risk and doing that work.
In London, when a firm lists on the stock exchange or issues corporate bonds, the same arrangement happens, just with different regulators and slightly different paperwork. The principle travels well because risk always needs a price, whether you are in Lagos or in the City.
A company plans to raise ₦10,000,000,000 through a bond issue. The underwriters charge a fee of 2 percent for guaranteeing the sale, which comes to ₦200,000,000. Whether the bonds sell out in a day or trickle out over weeks, the company has already paid for that certainty upfront.
Questions people ask
Who actually pays the underwriting fee, the company or the investors?
The company raising the money pays it, usually deducted from the total funds raised before the company gets its hands on the balance.
Is the underwriting fee the same as brokerage commission?
No. Brokerage commission is what you pay your stockbroker for buying or selling shares on your behalf, while underwriting fees are paid by the issuing company to the banks organising and guaranteeing the whole sale.
Does a higher underwriting fee mean the offer is riskier?
Often yes. Underwriters charge more when they expect the shares or bonds might be harder to sell, since they are pricing in the chance they will be left holding unsold stock.
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