Types of Underwriting.

1) Wholly underwritten – where one person is responsible to subscribe all the

issue.
2) Partially underwritten – where some part of the issue is underwritten by
company.

Types of Underwriting contracts.

1) Normal underwriting – where the underwriter agrees to take up
shares/debentures only when the issue is not subscribed by the public in full.
2) Firm underwriting - where an underwriter agrees to buy a certain number of
shares/debentures in addition to the shares he has to take under the
underwriting agreement. Even if the issue is oversubscribed, underwriters are
responsible to take up the agreed number of shares in case of firm
underwriting.

Important terms in underwriting

Marked Application - Generally, the forms are stamped with the name of the
underwriters in order to differentiate the forms of one underwriter from that
of others. Such stamped applications when received are called marked
applications.

Unmarked Application - The application forms which are received by the company
without any name of the underwriter are called unmarked applications.

Underwriting Commission
i. The payment of commission is possible only when the same is authorized by
the Articles.
ii. The commission paid or agreed to be paid does not exceed
a. In case of shares, 5% of the price at which the shares are issued or the
amount or rate authorized by the Articles, whichever is less, and
b. In case of debentures, 2½% of the price at which the debentures are
issued or this amount or rate authorized by the Articles, whichever is less.
iii. No underwriting commission shall be paid to any person which are not
offered for public subscription.
iv. Underwriting commission should always be calculated on the issue price of
shares or debentures of the guaranteed issue.
Journal entries:

Sl. No. Entries

1) For Commission due
Commission A/c Dr
To Underwriter’s A/c
2) For Commission paid
Underwriter’s A/c Dr
To Bank A/c
3) For acquiring any liability in case of under-subscription
Underwriter’s A/c Dr
To Share Capital/Debentures A/c
4) For receiving payment from underwriter
Bank A/c Dr
To Underwriter’s A/c
Illustration:
SK Ltd has issued 60,000 Equity shares at 10 face value. The issue was
underwritten by P, Q and R in the equal proportion.

In this regard, the company has received the shares in the following manner
through the underwriters:

P: 15,000; Q: 25,000 and R: 5,000.

Further the company has received 6,000 shares without any identity

The company requests you to compute the net liability and share a commission
of 5%.