Underwriting DRP - what's the purpose?

[Gunlom]

I'm abit confused about the purpose of underwriting a DRP,

as I understand it in a DRP, if 30% of the shares are participating in it the company gets to keep 30% of the dividend in cash and issue shares in the company to the value of the money kept, the rest is kept by the other 70% of shareholders.

so whats the point of underwriting the DRP??

many companies are doing it at the moment.

anyone enlighten me on this??

 

[skc]

Many companies need cash, but also want to prop up the share price without cutting dividend. DRP is a way to recirculate the cash back into the company via issuing new shares. Shareholders, however, may want to pocket the cash dividend without increasing the number of shares they hold. So they may opt not to participate in the DRP, esp in the current environment.

By asking someone (e.g. an i-bank) to underwrite the DRP to a certain amount, the company can get the cash they need, even when shareholders choose not to participate. Obviously this service comes at the fee, and the fee depends on the prospect of the company's shares.

e.g. ACME Co declared $100M dividend, and decided to underwrite $50M with QQ i-bank. Shareholders only participated to the extent of $10M, so QQ i-bank pays up $40M and receives the remaining DRP issued new shares. QQ will then have to sell that holding down later, potentially at a loss.