Page 251 - DMGT407Corporate and Business Laws
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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.
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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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