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Unit 10: Underwriting of Shares

10. If an underwriter wants to reduce his liability, he can do so by entering into another Notes
contract with sub-underwriter.
11. Commission received from a company is credited in the underwriting account.

12. Amount in shares or debentures given to sub-underwriter is debited to underwriting
account.

10.9 Sub-Underwriting

In order to reduce the liability of underwriting contract, the underwriter may enter into a
contract with a number of persons who we called sub-underwriters. The sub-underwriting
contract is signed between the main underwriter and sub-underwriter. Sub-underwriter has
nothing to do with the company. Therefore he gets his commission from the main underwriter
which is called sub-underwriting commission. Sub-underwriting commission is debited to the
underwriting account. In case of undersubscription, the sub-underwriter has to take shares or
debentures as may fall to his share from the main underwriter. The underwriting account is
credited with the allotment money on these shares.

10.10 Overall or Overriding Commission

This is an additional commission which is paid by the company to the underwriter for providing
the services of sub-underwriters. This is calculated on the entire underwritten amount of shares
or debentures at a fixed percentage. On account of being the income of the underwriter, this is
credited to the underwriting account. When the maximum rate of underwriting commission is
decided, this commission also includes in underwriting commission as per Section 76 of
Companies Act.
II. When more than one account is maintained by the underwriter
In this system, the underwriter opens the following accounts in the place of underwriting
account.
(i) Investment in Shares Debentures in Co. Ltd. or Underwriting Account.
(ii) Underwriting Commission Account.
(iii) Issuing Company Account.

(iv) Sub-underwriting Account.

Notes In order to reduce the liability of underwriting contract, the underwriter may enter
into a contract with a number of persons who we called sub-underwriters.

10.10.1 Accounting Treatment

(i) When shares or debentures are taken up under underwriting agreement –
Underwriting Account (Shares or Debentures in X Co.) Dr.
To Issuing Company.

(ii) When the amount is paid by underwriting regarding the expenses of underwriting–
Underwriting Shares or Debentures in X Co.) Dr.
To Bank Account.

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