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Corporate and Business Laws




                    Notes          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.



                                     Did u know? 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 commissions 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.

                                   11.1.3 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.

                                       !
                                     Caution  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).

                                   11.1.4 Listing of the Shares on a Stock Exchange

                                   Shares of a public company may be sold or purchased on stock exchange. But for this purpose the
                                   company has to get permission from the stock exchange authorities. Section 73 provides that it
                                   is necessary for every public company, before issuing shares or debentures for public subscription




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