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Undivided Account

Definition

“Undivided Account” , also known as “Eastern Account” , is a term commonly used in securities underwriting. It signifies that each underwriter in a consortium is responsible not only for selling its allocated amount of the new issue, but also for any unsold portion of other participants’ allocations. Essentially, it implies that the liability for securities is shared equally among the underwriters until all the shares are sold.

Phonetic

The phonetics of the keyword “Undivided Account” are:Undivided: ˌəndɪˈvaɪdɪdAccount: əˈkaʊnt

Key Takeaways

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  1. Undivided Account: An undivided account also known as “Eastern Account” is a type of syndicate bidding in which the entire group is responsible for selling all of the securities offered. If one member fails to sell its allotment, the entire group is left to sell those remaining securities.
  2. Risk Sharing: This type of account signifies risk sharing. Undivided accounts are often set up for large security offerings where there is some doubt whether all the securities offered can be sold. In such case, the risks are shared across the syndicate group.
  3. Frequently Utilized: They are often used in the bond market. When municipal and corporate bonds are issued, underwriters will frequently use an undivided account to spread the risk of the issue across a syndicate of investment banks and broker-dealers.

Importance

The term “Undivided Account” holds significance in business finance as it refers to a type of underwriting agreement where underwriters are collectively responsible for selling all securities on offer. This is important because, in such an agreement, the risk is distributed among all the underwriters involved. If any securities remain unsold, the underwriters must purchase the leftover shares themselves, hence sharing the financial exposure. Therefore, an undivided account, also known as “Eastern Account,” provides stability and security to the issuer, ensuring greater chances of successful securities sale and mitigating the risk in case the securities don’t get fully sold in the market.

Explanation

The Undivided Account is a financial term that typically refers to an arrangement where underwriters of a new issue, usually bonds or initial public offerings, are individually responsible for selling a certain percentage of the issue. However, in case any underwriter cannot sell its allotment, they are collectively responsible for selling any remaining securities. This account type is also known as an “Eastern Account”.The principal purpose of an Undivided Account is to mitigate the risk for individual underwriters during a new securities issue. This form of account enables financial institutions to equally share in the liabilities of unsold securities, ensuring that no single underwriter bears the entire risk. For instance, if one underwriter fails to sell their shares, instead of that underwriter bearing the loss or having the unsold shares returned to the issuer, the other underwriters step in to help sell the remaining shares. This way, the risk and the responsibility become distributed among all participating underwriters.

Examples

An Undivided Account, often known as “Eastern Account” in the financial and business worlds, represents a joint liability agreement among underwriting group members for the unsold portion of a new issue. Underwriters have to sell all the securities from an offering. If they are unable to do so, they must purchase the unsold shares themselves, equally distributing the burden of shares.Three real-world examples are:1. Initial Public Offering (IPO): When a company decides to go public, they often seek the services of an investment bank to underwrite the IPO. The investment bank forms an underwriting group and shares the liabilities of selling all the issued shares in an Undivided Account. If any stock remains unsold, all underwriters in the syndicate must purchase the stock themselves based on their agreed upon proportions. A recent example being the IPO of Uber where several underwriters such as Morgan Stanley, Bank of America, and Barclays had to undertake such a risk.2. Bond Issuing: Government bodies or Corporations often issue bonds to raise funds. Similar to IPOs, these bonds are also underwritten. If a certain portion of the issued bonds doesn’t get sold, underwriters in the Undivided Account must purchase those remaining bonds. For instance, in 2010, when the U.S. Treasury issued bonds, several underwriters were involved under an Undivided Account agreement.3. Mutual Funds: A mutual fund company issuing new funds may also operate under an Undivided Account. If the new funds do not attract enough investors, the underwriters are required to purchase the unsold shares according to their commitment in the syndicate.

Frequently Asked Questions(FAQ)

What is an Undivided Account?

An undivided account, also known as Eastern account, is a term used in the financial sector, notably in underwriting, which refers to an arrangement where underwriters are collectively liable for selling all shares in an Initial Public Offering (IPO) or secondary offering. If a portion of the shares remains unsold, underwriters must take them in proportion to their participation in the deal.

How does an Undivided Account work in business?

In an undivided account, underwriters are responsible for any unsold portion of an issue. Each underwriter is responsible for selling a certain allotment, and if any part of the allotment remains unsold, the underwriter is required to buy the remaining shares.

Is an Undivided Account the same as a Western Account?

No, an undivided account differs from a Western Account (or divided account). In a Western Account, each underwriter is only responsible for their specific allotment of shares. If they are unable to sell them, they are not required to purchase the unsold shares.

What is the main advantage of an Undivided Account?

The main advantage of an undivided account is the shared risk among underwriters. This type of account might appeal to underwriters because the liability is shared rather than being on a single entity or few entities.

Are there any risks associated with an Undivided Account?

Yes, in an undivided account, if an underwriter’s allotment is not fully sold, they are obligated to buy up the remaining shares. If the shares’ value drops significantly, it can lead to substantial losses for the underwriter.

In what context is an Undivided Account usually seen?

Undivided accounts are most commonly seen during IPOs and share issuing processes. Investment banks, underwriters, venture capitalists, and institutions involved in the process of issuing and selling securities frequently deal with undivided accounts.

Who is responsible for coordinating an Undivided Account?

Usually, a lead underwriter, often an investment bank or other financial institution, will manage the undivided account. The underwriters will work collectively to sell all the shares of the issue.

Related Finance Terms

  • Allotment: In the context of an undivided account, allotment refers to the distribution of securities assigned to underwriters for sale to investors.
  • Underwriting Agreement: This is a contract put in place between a group of underwriters (led by a managing underwriter) and the issuer in a new securities issue where the underwriters agree to purchase all the unallocated securities.
  • Eastern Accounting: Also referred to as undivided accounting, where each participating investment banker in a new issue is responsible not only for selling its allotment, but also for a part of any unsold allotment.
  • Initial Public Offering (IPO): An event in which undivided accounts typically play a major role. An IPO refers to the first sale of stock by a company to the public. The process often involves an undivided account wherein a group of underwriters come together to sell the newly issued shares to the public.
  • Securities: These are the tradable financial assets that are often the core of undivided accounts. They can be either equity securities (stocks) or debt securities (bonds).

Sources for More Information

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