Penalty Bid Law and Legal Definition

Penalty bid is a bid, or offer to purchase securities, provided by a lead underwriter or other member of a syndicate as part of Initial Public Offering. It is an arrangement that permits the managing underwriter to reclaim a selling concession from a syndicate member in connection with an offering when the securities originally sold by the syndicate member are purchased in syndicate covering transactions. It is a financial penalty imposed by the underwriter of a new securities issue against a broker whose customer’s sold shares of the issue immediately after purchase. Penalty bid stabilizes the price of a new issue in the after market.