Page 239 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes
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Caution Partial underwriting means that only a portion of the issue is underwritten by the
underwriter. In such case, balance of the issue of shares or debentures is treated as
underwritten by the company itself. Partial underwriting can be done by one underwriter
or more than one underwriter.
Net Liability of Underwriters = Total gross liability – Marked applications received by company.
Illustration 5 (Partial Underwriting by More than One Underwriter)
A public limited company issued 1,00,000 equity shares of ` 100 each at a discount of 10%. This
issue was underwritten as follows:
X - 40%, Y - 20%, Z - 20%.
The company received a total number of 70,000 applications of which marked applications were
as follows:
X – 30,000, Y- 15,000 Z – 17,000
Determine the Liability of each of the underwriter.
Solution:

Statement Showing the Net Liability of Underwriters in Shares
Underwrites
Total
Particulars X Y Z
Liability in Percentage 40% 20% 20% 80%
Gross Liability in Shares 40,000 20,000 20,000 80,000
Less : Marked Application 30,000 15,000 17,000 62,000
Net Liability of underwriters 10,000 5,000 3,000 18,000

10.7.3 Firm Underwriting Agreements

In case of firm underwriting agreements, the underwriters agree to accept an additional liability
along with the shares or debentures they have to take under the underwriting agreement. In this
case, the underwriters get priority over the general public at the time of allotment of shares. In
the case of under subscription the total liability of the underwriters will be the addition of net
liability for unsubscribed shares on the basis of underwriting agreement and liability under
firm underwriting. In the absence of information in the question, firm underwriting should be
treated as included in the given marked application forms because firm underwriting shares are
subscribed by the underwriters themselves under their seal.
In the case of undersubscription, to determine the liability of underwriters, the benefit of firm
underwriting can be given to all underwriters if firm underwriting is included in the unmarked
application or if the benefit of firm underwriting is be given this to individual underwriters,
firm underwriting should be included in marked applications. Actually, this depends upon the
terms of agreement with underwriters. This entire procedure can be explained in the following
steps:

1. Gross liability of all underwriters is calculated in their agreed ratio:
2. Marked applications of each underwriter are deducted.
3. Then from the balance (2) above, unmarked applications from gross liability are deducted
in their gross liability ratio.

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