Page 257 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes 10.11 Summary

 Underwriting involves the orderly process of security registration for the financial sourcing
of a public offering through the purchase of securities for resale to the public. The
underwriting may be a firm commitment to purchase the entire amount of the company’s
securities regardless of the ability to resell them. The underwriting of such a low-priced
initial public offering (IPO) and other less-well-known stock (e.g., over-the-counter stock)
may be done on a best-efforts basis where the underwriter acts only as an agent and
accepts no financial liabilities.
 A successful underwriting not only sells the securities, but does so at a fair price. In
addition, underwriters maintain a stable, liquid aftermarket for the trading of securities.

 Until the 1950s, underwriting was the only function performed by a number of specialty
houses. Thereafter, underwriters merged their talents with retail and institutional sales in
order to bolster their sagging bottom lines. Today there is little distinction between
wholesale underwriting, which serves institutional clients including broker-dealers, and
retail underwriting, which sells directly to individual investors.
 Most underwriting in the 1990s was handled by investment banks and brokerage firms. In
1996 the Federal Reserve Board lifted the revenue limit on securities underwriting by
commercial banks and their subsidiaries from 10 to 25 percent. Although the ruling
represented another falling barrier between investment banking and commercial banking,
it was expected to have little effect on the underwriting industry.
 Large underwriting firms assist the largest corporations with secondary offerings and
maintain a financial advisory role for the long term. As full-service houses, large firms
need to handle IPOs in excess of $15 million for the fees to be profitable.
 Medium-size underwriting firms generally serve regional interests and handle offerings
within the $5 to $15 million range. Although established companies, they lack the full
range of services and number of personnel dedicated to underwriting and distribution.
These firms are not likely to maintain a financial advisory capacity to their clients.

10.12 Keywords

Complete Underwriting Agreement: When the underwriter gives the guarantee to the company
that whole issue will be subscribed by the public, it is called complete underwriting.
Firm Underwriting: When an underwriter makes an agreement to purchase a certain number of
shares or debentures of the company, in addition to the shares or debentures he has to take
under the underwriting agreement, it is called firm underwriting.
Investment in Shares or Debentures: To calculate the profit or loss on underwriting of particular
issue, the underwriters maintain only one account – Underwriting Account. This account is also
called by the name of “Investment in Shares or Debentures.
Partial Underwriting Agreement: When only a part of issue of shares or debentures is
underwritten by the underwriters, it is called partial underwriting.
Underwriting of Shares: It means the contract in which underwriter agrees to take shares which
will not be subscribed by public.
Underwriting Commission: A commission is paid to underwriters which is called underwriting
commission.
Unmarked Applications: Those applications which bear the official stamp of an underwriter or
broker are called marked applications and those which do not bear the official stamp of an
underwriter, are called unmarked applications.

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