Page 171 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes take up the issue, he or they will do so. In return for this undertaking, the company agrees to pay
the underwriter a commission on all shares or debentures, whether taken up by the public or by
the underwriters.
Section 76 prescribes certain conditions subject to which underwriting commission may be paid.
These are:
1. The authority to pay is given in the articles of the company. Authority in the Memorandum
is not suffi cient [Republic of Bolivia Exploration Syndicate Ltd. (1914) 1. Ch. 139].
2. The commission payable cannot be more than 5 per cent of the issued price of shares and
per cent of the price of debentures.
3. The commission can be paid only on shares issued to the public.

4. The payment must be strictly by way of ‘commission’ and not merely a device to issue
shares at a discount.
5. The rate of commission and the number of shares and debentures which the underwriters
have agreed to subscribe for a ‘commission’ should be disclosed in the prospectus.
6. The names of the underwriters and the opinion of the directors that the resources of
the underwriters are sufficient to discharge their obligations must be disclosed in the

prospectus.
When prospectus is issued to the public and the issue is a success, i.e., the issue has been
subscribed fully, the underwriters are not required to take up the shares, but they receive their
commission. On the other hand, if the issue is a failure, i.e., the issue has not been subscribed
fully, the underwriters have to take up the shares not subscribed for by the public and pay for
them. In this case also, they will get their commission.
Under s.69, as we shall see later, a company must receive applications equivalent to the
minimum subscription as mentioned in the prospectus, otherwise money become refundable to
the applicants. But when the issue is underwritten, the company is sure of getting the minimum
subscription, as the underwriters act as insurers against under-subscription.

Sub-underwriting. Every underwriter has a certain limit up to which he would go in for taking
risk by entering into an underwriting contract. The underwriters usually choose to spread their
risk by using sub-underwriters who agree to take a certain number of shares for which they
accept responsibility and for which they receive a commission out of the commission received by
the underwriters. The difference between the commission paid by them to the sub-underwriters
is known as overriding commission.
SEBI Guidelines relating to underwriting. SEBI guidelines for disclosure and investor protection
provide rules as to underwriting.

9.3 Brokerage Contracts

In addition to underwriters, a company may also enter into brokerage contracts with brokers.
A broker is a person who undertakes to ‘place’ shares, i.e., find persons who will buy shares, in

consideration of an agreed brokerage and if he fails to place any of the shares, he is not personally
liable to take them, nor is he entitled to any brokerage in respect of shares not placed. The
underwriter, on the other hand, is bound to take up the shares, which the public has not taken
and is entitled to the whole of the agreed commission.

It may be noted that there must be authority in the articles to pay brokerage and the brokerage
must be disclosed in the prospectus, or statement in lieu of prospectus, as the case may be and it
should pay a reasonable brokerage (s.76).

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