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A paying agent, also known as a disbursing agent, is an agent who makes payments on behalf of an issuer of securities such as stocks and bonds. Typically, a bank acts as a paying agent although sometimes the treasurer of the issuing agent may act as the paying agent. In exchange for this service, the paying agent is compensated with a fee, the terms of which are usually worked out when the issuing agent establishes a contract for services.
In the case of stocks, periodic dividends must be issued to people who hold stocks. The issuing agent disburses the dividend to the paying agent, who then distributes payments to the stockholders. This requires holding records pertaining to stockholders so that dividends can be correctly routed to their destinations. With bonds, bondholders are entitled to payments on principal and interest. The paying agent distributes these payments as scheduled once he or she receives them from the issuing agent.
Paying agents are not responsible financially for these payments; if an issuing agent fails to disburse payments to the paying agent, the paying agent is not required to cover them. Instead, they solely act as processors for payments so that they are distributed properly and in a timely fashion. If a company cannot make payments as scheduled, this is because it is in extreme financial trouble and it may be in the process of applying for debt restructuring or filing bankruptcy.
Companies that need to distribute payments on their securities utilize investment banks that specialize in these services. Their experienced personnel can administer the process smoothly and efficiently. Such firms are also up to date with the laws surrounding payment disbursements and other matters, so they can confirm that disbursements comply with the law and will not subject the company or its agent to penalties. As the law is periodically updated and revised, it is critical for companies to work with paying agents which keep up on regulatory developments and know when changes will take effect.
When developing a relationship with a paying agent, an issuing agent usually approaches several investment banks. Representatives of the banks develop contracts which issuing agents can reject or agree too. The two companies may engage in negotiations to work out terms which are favorable to both parties, especially in cases where a paying agent particularly wants an issuing agent's business because it stands to make significant amounts of money in fees.