MODULE 2

UNDERWRITING OF SHARES AND DEBENTURES

Underwriting is an agreement between the underwriter and the company whereby the
underwriter gives the guarantee for subscribing certain number of shares which were not
subscribed by the public, for a consideration called underwriting commission

Underwriting commission: It is the consideration payable by the company to the underwriter

for underwriting the shares or debentures of a company. It is usually paid as a percentage one
total issue price of the shares or debentures underwritten. As per the Companies Act, the
commission should not exceed 5% of the nominal value of a share and 2.5% in case of
debentures.

Underwriter: is a person or institution who guarantees to buy all the unsold shares shares or
debentures in a public issue.

Broker : is a person who acts as a connecting link between purchaser and seller of shares to
conduct a transaction.

Difference between underwriter and broker

Underwriter Broker
1. The person or institution underwriting a 1. A person who buys and sells things for
public issue of shares or debentures is other people is called broker.
called underwriter. 2. They do not take any responsibility of
2. They take responsibility of subscribing. subscribing.
3. If whole of issue is not subscribed by 3. Broker is not liable to take any shares
the public, underwriter is liable to take or debentures.
balance of shares or debentures. 4. Remuneration paid to the broker is
4. Remuneration paid to the underwriter is called brokerage.
called underwriting commission.

Types of underwriting

1. Open or Pure underwriting: It is a contract between the company and underwriter,

whereby the underwriter agrees to subscribe for shares or debentures of the company
which are not applied for by the public.
2. Complete underwriting: It is an underwriting of the whole issue of shares or debentures
of a company by a single underwriter or more than one underwriter.
3. Partial underwriting: When only a part of the issue of shares or debentures of a
company is underwritten, it is termed as partial underwriting.
4. Firm underwriting: Under firm underwriting, the underwriter, agrees to take a specified
number of shares or debentures, in addition to the unsubscribed shares or debentures.
 5. Joint underwriting: When the issue is too large, the issuing company itself appoints
more than one underwriter to reduce the burden from a single underwriter.
6. Sub underwriting: An underwriting agreement by an underwriter with another
underwriter, for transferring a part of his underwriting risk, is called sub underwriting.
Difference between open underwriting and firm underwriting

Open underwriting Firm underwriting

1. The underwriter is liable to purchase the
shares or debentures only if the shares or
debentures are not fully subscribed by the
public.
2. An open underwriting exists by itself.
3. The liability of the underwriter is
conditional.
4. In case of over subscription, the company
need not allot the shares or debentures to
the underwriter
1. The underwriter is liable to purchase
both the unsubscribed shares or
debentures and the shares or
debentures of the company firmly
underwritten.
2. A firm underwriting is accompanied
by open underwriting.
3. The liability of the underwriter is
absolute.
4. In case of over subscription, the
company is bound to allot to the
underwriter the shares or debentures
which he has underwritten under
firm underwriting agreement.

Marked application: Application forms for shares or debentures received by the

company bearing the official stamp of underwriter are called marked applications.
Unmarked applications: The application forms for shares or debentures received by the
company without bearing the official stamp of the underwriter are called unmarked
applications.

UNIVERSITY QUESTIONS

1. Z ltd issued 30000 shares of Rs.10 each. The issue was underwritten by X- 30%,Y -
30%, and Z - 20%. The company received aplication for 25000 shares. Determine the
liability of the underwriters. (MARCH 2021)
2. Max Ltd issued 150000 equity shares of Rs. 10 each. The whole issue was
underwritten by Pan ltd and San ltd to the extent of 70 % and 30% respectively.
Max ltd received 125000 share applications of which the marked applications
were Pan - 45000 and San - 25000. Determine the liability of Pan Ltd and San ltd.
(NOV 2018)
3. Mazon Ltd issued 50000 shares at a premium of Rs. 10 per share. The entire issue was
underwritten by X - 30000 shares; Y- 15000 shares; Z- 5000 shares. They also applied shares
firm X - 5000 shares; Y - 2000 shares; Z - 1000 shares. Out of the issue 45000 shares
including firm underwriting were subscribed. Marked forms were X - 16000 shares; Y -
10000 shares; Z - 4000 shares. Calculate the liability of each underwriter assuming shares
underwritten are treated as unmarked applications (OCT
2019)