What is 'Devolvement'

Devolvement refers to a situation when the undersubscription of a security issue, such as an initial public offering (IPO), forces the underwriting investment bank to purchase unsold shares during an offering.

During the underwriting process, investment banks raise capital for companies that are issuing equity or debt securities,and if those securities aren't snapped up by investors, the responsibility for the unsold shares devolves to the underwriters.

Devolvement is often an indication that the market currently has negative sentiments toward the issue. This negative sentiment can have a significant impact on subsequent demand for the company's shares, and can cause losses for the banks.

BREAKING DOWN 'Devolvement'

Devolvement poses substantial risk for the underwriting investment bank. When it is required to purchase unsubscribed shares of an issue, it will often purchase the stock at a higher-than-market-value price. Because demand is lower than anticipated, there are few buyers for the security at its issued value.

Typically, the investment bank will not hold onto the floundering issue in its own account for too long; it  will usually liquidate the shares in the secondary market, often incurring a financial loss.

Devolvement in the U.S. and abroad

For all the appealing reasons to do an IPO, such as vastly enhanced capital and media attention associated with a company, an undersubscribed offering has big risks for companies and underwriting banks.

"In your consideration on whether to take that leap of faith, it is pertinent to properly evaluate and consider the requirements, processes and pros and cons involved in filing an IPO to determine the best course for your company," according to Deloitte, which offers a checklist for pre-IPO prep, to help companies make sure they're ready for an IPO and avoid an undersubscribed offering.

Most of the time in the U.S., the company that hopes to go public and the investment bank underwriting the IPO have done the necessary homework to ensure the initial shares are all purchased and devolvement isn't necessary.

Other emerging economies in recent years have gotten better at taking similar steps to ensure that IPOs are well-considered and fully-subscribed.

For example, Reuters reported in 2015 that China’s securities regulator would "devolve some of its authority over approving initial public offerings to the Shanghai and Shenzhen Stock Exchanges," which it called another step toward a U.S.-style "registration" system for IPOs.

The China Securities Regulatory Commission aimed to "dissolve its Issuance Examination Committee, which approves IPOs and secondary offerings," according to Reuters. "The CSRC would then allow the Shanghai Stock Exchange and the Shenzhen Stock Exchange to create 'hearing committees' similar to those used in Hong Kong to vet new listings."

According to the news report, China is "working to shift from an approval-based system to a registration-based one in a bid to let market players play a bigger role in determining the timing and pricing of IPOs."

  1. Undersubscribed

    Undersubscribed is a situation in which demand for IPO securities ...
  2. Eating Stock

    Eating stock refers to the forced purchase of a security when ...
  3. Lead Underwriter

    A lead underwriter is usually an investment bank that organizes ...
  4. Bought Deal

    A bought deal is a securities offering in which an investment ...
  5. Underwriting Agreement

    An underwriting agreement is a contract between a group of investment ...
  6. Standby Underwriting

    Standby underwriting is an IPO sales agreement in which the underwriter ...
Related Articles
  1. Insurance

    What is Underwriting?

    Underwriting is a term most often used in investment banking, insurance and commercial banking. Generally, underwriting means receiving a remuneration for the willingness to pay for or incur ...
  2. Insurance

    Initial Public Offering (IPO) Explained

    An initial public offering (IPO) marks the start of a company's publicly traded life. Find out why companies undergo IPOs, and how the process works.
  3. Investing

    How an IPO is valued

    The initial valuation of an IPO can determine the success or failure of a specific stock – but how is that price determined?
  4. Investing

    Market Volatility, Weak Economy Delay Major IPOs

    These outside factors can delay and affect IPOs when they are finally listed on a stock exchange.
  5. Managing Wealth

    Top 6 Performing IPOs of 2015 (ONCE, GBT)

    2015 has produced a mixed year for initial public offerings, with small biotechs overcrowding the winner’s list.
  6. Investing

    China Resumes IPOs After 4 Months

    On November 6, 2015, China’s security regulators lifted a four-month suspension on initial public offerings, reasoning that investor confidence in China’s stock market has improved.
  7. Personal Finance

    The Rise of the Modern Investment Bank

    Get to know a little bit about investment banks, the institutions whose actions help guide free markets.
  8. Investing

    What's the Difference Between an IPO and a Direct Listing?g?

    These are the key differences between an initial public offering and a direct listing of shares
  1. What does the underwriter do in a new stock offering?

    Learn the role an underwriter plays for an initial public offering, and the steps an underwriter takes in preparing for an ... Read Answer >>
  2. How do I become an underwriter?

    Learn about the education, training and certification required to become an insurance underwriter and the important qualities ... Read Answer >>
  3. What are the advantages and disadvantages for a company going public?

    Companies often use an initial public offering (IPO) as a way to generate capital. There are both advantages and disadvantages ... Read Answer >>
  4. How does an IPO get valued?

    Learn how the price of a financial asset traded on the market is set by the forces of supply and demand. Read Answer >>
  5. What's the difference between primary and secondary capital markets?

    In the primary market, investors buy securities directly from the company issuing them, while in the secondary market, investors ... Read Answer >>
Trading Center