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Accounting for Companies-I

Notes underwriters have agreed to underwrite and to take up, and the amount or rate of
commission should also be disclosed in the prospectus as per provision of Section 76 of the
Companies Act.
(ii) In Statutory Report: The extent to which each underwriting contract, if any, has not been
carried out and the reason therefore, should be stated. This is merely because the directors
at the time of issuing a prospectus give a declaration that in their opinion, the underwriters
have the resources to carry out their obligations.

(iii) In the Balance Sheet: As per the requirements of the Schedule VI of the Companies Act, all
underwriting commission or brokerage payable must be shown in the assets side of the
balance sheet under the heading ‘Miscellaneous Expenditure’.

Distinction between Underwriter and Broker

As discussed earlier, an underwriter is that individual who agrees to take over a certain number
of shares or debentures if the public does not subscribe to them. An amount for this consideration
payable to the underwriter is called underwriting commission. On the other hand, a broker is a
person who provides services in bringing a settlement between a seller and purchaser of the
shares or debentures for a reward which is called brokerage. A broker can also procure the
subscription to the shares or debentures from the public on the behalf of the company. Such a
broker can only procure the subscription and does not undertake the responsibility of subscribing
to the shares or debentures of the company. As per Section 76(3) of the Companies Act, a
company is permitted to pay a reasonable amount of brokerage in addition to the payment of
underwriting commission.

10.6 Rates of Underwriting Commission, Brokerage and

Remuneration to Managers

Following the SEBI guidelines, the following rates regarding the payment of underwriting
commission, brokerage and remuneration to manager to the issue were issued by the Ministry
of Finance on 7th May 1985:-
1. Maximum Limit of underwriting Commission for Payment:

On amounts developing on the On amounts subscribed
underwriters (percent) by the public (percent)
(A) Equity Shares 2.5 2.5
(B) Preference shares/Convertible & Non-
Convertible debentures:
(i) Up-to the amount of 5 Lakhs. 2.5 1.5
(ii) For months in excess of 5 Lakhs. 2.0 1.0
2. Maximum Limit of Brokerage:
(i) Brokerage is fixed at 1.5% in respect of all types of public issue of the industrial
securities whether the issue is underwritten or not.
(ii) No company will pay any postage (mailing cost) or other cost out of pocket expenses
for canvassing the public etc., to any broker.

(iii) The listed companies are permitted to pay brokerage on private placement of capital
at a maximum rate of 0.5%.
(iv) No brokerage will be paid in respect of employees, directors, their friends and
promoters quota and rights issue.

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