Paying Agent

Paying agents initiate payments between a security issuer and an investor. Typically, banks play the role of paying agents. Alternatively, a treasurer can also fulfill this responsibility. The agent receives a fee for their services; fee details are mentioned in the paying agent agreement.

This payment could be the principal amount, bonuses, or dividend payouts. These agents ensure accuracy, and scheduling (timely payments). They are also called disbursing agents as they accept payments from security issuers, distribute funds among investors, and work as intermediaries.

• A paying agent is an entity that collects investor data and undertakes various monetary transactions involving stocks and bonds. They are also called disbursing agents.
• The disbursing agent pays the role of an intermediary and therefore is compensated by a fee. The fee is mentioned in the disbursing agent agreement.
•  The disbursing agent is only responsible for the payment completion and therefore does not interact with any security holder to clarify any queries or confusion.
• Investors will have to contact the issuing agent directly if a problem is associated with the payment.

Paying agents receive instruction from issuing agents to direct the transactions toward investors and stockholders. Simply put, companies use paying agents to distribute payments to investors. This payment could be the principal amount, bonuses, or dividend payouts. Thus, paying agents conduct transactions, ensure accuracy, and schedule payments. They are also called disbursing agents.

It is important to note disbursing agents are not financially responsible for making those payments. If the disbursing agent does not receive the transaction amount from the issuing agent or the company, the responsibility falls on the issuing agent or firm. Again, disbursing agents do not cover payments from their end.

An issuing company establishes a network with various investment banks in real-world scenarios. Banks, financial institutions, and agents already have the expertise and distribution channels to handle multiple transactions. The firm undertaking these payments must comply with the terms, laws, and amendments.

Specifically, agents cannot advance money, offer loans, or discounts on a security’s redemption value. Agents are forbidden from altering any transaction for personal gains.

These agents earn a fee offered for their services. Agents facilitate channels based on their relationships with banks. The bank representative creates a contract that includes the disbursing agent fees and presents it to the issuing company.

The main components of a paying agent agreement are as follows.

#1 - Account

• Appointment of the disbursing agent.
• Establishment of accounts.
• Investments.

#2 - Disbursement, Resignation Termination, and Removal

• Fund disbursement.
• Tax reporting.
• Termination of agreement.
• Terms about the resignation and removal of the disbursing agent.

#3 - Responsibilities

• Representation and warranties.
• Disbursing agent fees and expenses.

The agreement is generally divided into multiple sections (as shown above). Each section contains elaborate details to avoid miscommunication between parties. This way, transactions are smooth. Queries, if any, are settled before undertaking a transaction.

It is important to note that banks create these agreements. The issuing company can compare the agreement with other banks and alternatives. Additional sections can be added to the agreement (for specific clauses) if required.

Paying agent responsibilities are as follows:

• The disbursing agent Initiates payments to the correct recipient at the right time.
• A presenter may or may not be a customer, but it is the disbursing agent's responsibility to redeem eligible securities within business hours.
• The disbursing agent is supposed to check ownership documents (about securities) before completing the payment.
• A disbursing agent is only responsible for disbursing; they are not liable in scenarios where they fail to receive payments from the issuing company. The ultimate liability falls on the issuing company.
• A disbursing agent is only responsible for the payment completion and therefore does not interact with any security holder to clarify any queries or confusion. Investors will have to contact the issuing agent directly if a problem is associated with the payment.
• Disbursing agents are expected to be updated about changes in regulations, laws, and SEC guidelines.
• Some disbursing agents offer additional services like document processing, interest calculation, and dividend automation.

Now, let us look at paying agent vs transfer agent vs escrow agent comparisons to distinguish between them.

• The paying agent is responsible for payment initiation. On the other hand, a transfer agent is liable for maintaining the investor's financial record and balance. In contrast, an escrow agent works as a third party who holds assets till the transaction is finalized.
• The disbursing agent is the link between issuers and investors. In comparison, a transfer agent tracks and maintains the records of an organization’s shareholders. On the other hand, escrow agents have a fiduciary duty toward both parties.
• Based on the roles, the agreement document varies. Disbursing agents sign a separate document. The transfer agent signs a transfer agreement, and the escrow agent signs an escrow agreement.
• Usually, paying and transfer agents are used for stocks and bonds. In comparison, escrow agents are more common for deals involving real estate.

This article has been a guide to what is a Paying Agent. Here, we explain its agreement, responsibilities, and comparison with the transfer and escrow agents. You can learn more about it from the following articles -

• Tender Offer
• Estate Planning
• Collection Agency