Page 229 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes Introduction

Underwriting of Shares means the contract in which underwriter agrees to take shares which
will not be subscribed by public. For getting fast minimum subscription from public of his
issued shares, company has to do this type of contract. With this, headache of selling and getting
minimum subscription will be of underwriter not company. For this, company gives
underwriting commission to underwriter which is controlled by SEBI. Still 5% on issue of
shares or actual rate which is agreed in article of association which is less, is accepted to give it
to underwriter.

10.1 Meaning of Underwriting

If an existing company issues its debentures or shares to the public, it is necessary to receive 90%
of the issued amount (minimum amount) from the public within 120 days from the date of
opening the issue. If the company does not get this amount it cannot begin the process of
allotment and has to refund the amount of applications to the applicants. In the case of a new
company, it cannot obtain the Certificate of Commencement of Business on the failure of receiving
this amount. In order to ensure the minimum subscription from public, the companies resort to
underwriting. Underwriting is an agreement whereby the underwriters give the guarantee to
the company that in case the shares or debentures offered to the public are not subscribed by the
public to an extent, the balance (shares not subscribed by the public) of shares or debentures will
be taken up by the underwriters. The underwriters can be some individuals, firms or companies.
There can be more than one underwriters. Nowadays, underwriting of shares or debentures is
also done by specialized financial institutions such as Industrial Finance Corporation of India,
Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of
India (ICICI), Unit Trust of India (UTI) etc. Nationalised banks also have jumped into the business
of underwriting.

10.2 Underwriting Commission

For this guarantee, a commission is paid to underwriters which is called underwriting
commission. This commission is calculated on the issue price of shares or debentures underwritten.
Underwriting commission is paid to underwriters in the whole of the issue underwritten
irrespective of the fact whether shares are subscribed by the public or not, but the company
should be authorized by its Articles of Association to pay this commission to underwriters. The
following points should be kept in account regarding underwriting commission:
(i) Rate of commission of underwriter should not be more.
(a) In the case of shares 5% of the issue price of shares or the amount or rate authorized
by the Articles of Association whichever is less, and
(b) In case of debentures, of the issue price of the debentures or the amount or rate
authorized by the Articles of Association whichever is less.
(ii) The commission paid or to be paid must be disclosed in the Prospectus or in the Statement
in lieu of prospectus.
(iii) The number of shares or debenture which the underwriters have agreed to take, should be
clearly shown in the prospectus.
(iv) A copy of contract with the underwriters regarding the payment of commission should be
given to the Registrar.
(v) No underwriting commission is paid on those shares or debentures which are allotted to
promoters group, employees, directors, their friends and business associates.

222 LOVELY PROFESSIONAL UNIVERSITY