It is a guarantee to the issuing the company, that the money that it requires for its project will definitely be raised. It means that even if the issue is not fully subscribed to by the public, the underwriters will make up the short fall.
Underwriting involves the underwriter agreeing to subscribe directly, or to procure subscription for the unsubscribed portion of the issue, which is not taken up. For the risk that the underwriter takes, he is paid commission. When there is more than one underwriter to an issue the liability is shared by them on pro-rata on the basis of amounts underwritten by them.
In other words underwriting is a device that ensures the success of new issues. New companies entering the markets for the first time, always face number of problems in raising funds from the market. One of the biggest problems of course that the company is not well known to the investors and many of them will be unwilling to invest their money in such ventures. Many a time even existing companies may find it difficult to raise money, due to some reasons. Issuing companies therefore approach different underwriters with a request to underwrite the issue.



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