UNDERWRITING OF SHARES AND DEBENTURES

1. INTRODUCTION
Underwriting is an agreement, with or without conditions, to subscribe to the
securities of a company when existing shareholders of the company or the public do
not subscribe to the securities offered to them.

When a company goes in for an initial public offer (IPO), it may face certain uncertainty about
whether its offer of shares or other securities will be subscribed in full or not. As per SEBI
Guidelines 14(4)(b) , it is required that if the company is not able to collect 90% of
the offer amount, then it needs to compulsorily return the money to those
who have subscribed to the shares and causing lot of issue expenses to go waste. This
uncertainty could be avoided by the help of a specialised group of risk-redeemers — called
Underwriters.

2. UNDERWRITING COMMISSION
 It may be paid in cash or in fully paid-up shares or debentures or a combination of
all these.
 Companies Act, 2013 provides that payment of commission should be authorized by Articles of
Association and the maximum commission payable will be as under:
In case of shares 5% of the issue price of the shares
In case of debentures 2 % of the issue price of the debentures

 Underwriting commission is not payable on the amounts taken up by the promoters,

employees, directors, their friends and business associates.
 Commission is payable on the whole issue underwritten irrespective of the fact that
whole of the issue may be taken over by the public.
 Commission is calculated on issue price unless otherwise mentioned.

3. SOLE UNDERWRITERS AND JOINT UNDERWRITERS

3.1. Sole Underwriters:
When the issue is underwritten by only one underwriter, such underwriting is
termed as ‘Sole Underwriting’.
For example, if an issue of 1,00,000 shares of Rs.10 each of X Ltd is
underwritten by A, it is the case of Sole Undewriting.
 In such a case, the distinction between marked and unmarked
applications is not of such significance.

3.2. Joint Underwriters:

The company may enter into underwriting arrangement with number of underwriters. This
arrangement is called Joint Underwriting (Co-underwriting). An individual underwriter will be
responsible only to the extent of shares underwritten by him.
For example, if an issue of 1,00,000 shares of Rs.10 each of X Ltd. is underwritten by A,
B, C, D in the ratio of 2:2:1:1, it is the case of Joint Underwriting.
In such case, the benefit of unmarked applications is given to the
underwriters in the ratio of their gross liability.
The benefit of marked applications is given to the concerned
underwriters in whose favour applications have been marked.

4. UNDERWRITING AGREEMENT
 Conditional underwriting:
Under this type of agreement, the underwriter agrees to take up agreed proportion of
shares, not taken up by the public. If the shares are fully subscribed by the public, the
underwriter does not take up any share.

 Firm underwriting:
Under this type of agreement, the underwriter agrees to take up a specified number of
shares irrespective of the number of shares subscribed for by the public. Unless it has
otherwise agreed, the underwriters' liability is determined without
considering the number of shares taken up 'firm' by him.
For Example, the entire issue X Ltd. Is underwritten as follows:
A 1,60,000 Shares (Firm Underwriting 3,600 Shares)
B 1,60,000 Shares (Firm Underwriting 2,000 Shares)
C 80,000 Shares (Firm Underwriting 1,200 Shares)
D 80,000 Shares (Firm Underwriting 10,000 Shares)
In this case only 4,63,200 shares (i.e. 4,80,000 shares – firm underwriting of 16,800
shares) will be offered to public and 16,800 shares will be taken by the underwriters even
if the issue is oversubscribed.

The benefit of firm underwriting may be given either

To an individual underwriter on the basis of his individual firm underwriting, or
 To all the underwriters in the ratio of their gross liability

That is Firm Underwriting may be treated at par with either ‘Marked

Applications’ or ‘Unmarked Application’.

5. TYPES OF SHARE APPLICATIONS

Share Applications

Marked Unmarked Firm

(Bearing the stamp (Do not bear any stamp of
of individual underwriter. Received by
underwriter) Company directly)
Credited to Credited
individual To all
underwriter
Credited to Distributed
Individual among all the
underwriter underwriters Depending upon the
condition / requirement of
underwriting agreement

Types of Applications Treatment for different types of application

Marked (Bearing the stamp Treatment No.1 Marked applications are always credited to the
of individual underwriter) individual underwriter

Unmarked (Do not bear any Treatment No.2 Unmarked applications are always distributed
stamp of underwriter. among all the underwriters
Received by Company
directly)
Firm Underwriting Treatment No.3 The applications for the firm shares are either
(Applications made by the credited to individual underwriter (i.e. Treatment No.1) or credited
underwriters themselves) to all (i.e. Treatment No.2) depending upon the conditions/
requirement of underwriting agreement.

6. FULL AND PARTIAL UNDERWRITING

 Full underwriting:
When the whole issue is underwritten by the underwriter(s) it is called as full
underwriting.
 For Example, X Ltd. Decided to make a public issue of 1,00,000 equity shares of Rs.10 each
which is entirely underwriter by A, B, C, D in the ratio of 2:2:1:1
In such case, the benefit of unmarked applications is given to the underwriter in the ratio
of their gross liability.

 Partial underwriting:
When a part (say 75%) of the whole issue is underwritten by the underwriters it is called as partial
underwriting.
For Example, X Ltd. Decided to make a public issue of 1,00,000 equity shares of Rs.10 each
out of which 90,000 shares are underwritten by A, B, C, D in the ratio of 2:2:1:1. It means
10,000 shares are underwritten by Company itself.
In this case if figure of marked application is not given separately,
(Marked applications = Total number of applications received x percentage
of underwriting.)
For the uncovered portion we can say company is liable, but company will
not take its own share rather it will remain unsubscribed.

7. CALCULATION OF LIABILITY OF UNDERWRITERS

Statement showing Net and Total liability of underwriters

[Figures - No. of shares]

No Particulars Basis A B
A Gross liability Ratio of Shares ××× ×××
Underwritten
B Less: Marked applications (excluding Actual ××× ×××
firm underwriting)
C Balance [ A - B ] ××× ×××
D Less: Unmarked applications allotted Ratio of Gross Liability ××× ×××
in the ratio of gross liability
E Balance [ C- D ] ××× ×××
F Less: Firm underwriting Actual or Ratio of Gross ××× ×××
Liability
G Net Liability as per agreement ( if no ××× ×××
balance is negative) [ E- F ]
H Add: Firm underwriting ××× ×××
I Total liability ××× ×××
8. STATEMENT SHOWING THE NET AMOUNT DUE FROM/TO OF
UNDERWRITERS
Statement Showing the Net Amount Due From/To Of Underwriters

[Figures - No. of shares]

No Particulars A B
A Total liability (Including firm underwriting) (No of Shares) ××× ×××
B Amount due on total liability ××× ×××
C Less Amount already paid on Firm Applications ××× ×××
D Amount due on net liability ××× ×××
E Less Underwriting Commission ××× ×××
F Net Amount due to Underwriters (if D<E) ××× ×××
Or
Net Amount from Underwriters (if D>E)

9. ACCOUNTING ENTRIES IN THE BOOKS OF THE COMPANY

No Particulars L.F. Debit Credit

1. Application Money received towards firm

Underwriting
Bank A/c Dr.
To Underwriter’s Personal A/c

2. Underwriter’s Liability [Application + Dr.

Allotment money]
Underwriter’s Personal A/c
To Equity Share Capital A/c
To Share premium A/c

3. Commission due Dr.

Underwriting Commission A/c
To Underwriter’s Personal A/c

4. Settlement of Account
(a) Receipt of money due from underwriters
Bank A/c Dr.
To Underwriter’s Personal A/c
(b) Payment to underwriters
Underwriter’s Personal A/c Dr.
To Bank A/c
 Questions for Practice

1. Total issue of 10,000 shares of Rs. 10/- each underwritten by Mr. X @ 4% commission.
Applications received from public for 8,000 shares.
Determine the underwriter’s liability and pass journal entries in the books of company

2. Gemini Ltd. came up with public issue of 30,00,000 Equity shares of Rs. 10 each at Rs. 15 per
share. A, B and C took underwriting of the issue in 3 : 2 : 1 ratio.
Applications were received for 27,00,000 shares.
The marked applications were received as under:
Name No of Marked Applications
A 8,00,000 shares
B 7,00,000 shares
C 6,00,000 shares
Commission payable to underwriters is at 5% on the face value of shares.
(i) Compute the liability of each underwriter as regards the number of shares to be taken
up.
(ii) Pass journal entries in the books of Gemini Ltd. to record the transactions relating to
underwriters.

3. Chaitanya Ltd. Issues 40,000 shares. Issue is underwritten by A, B and C in the ratio of 5:3:2
respectively. Unmarked applications were totalled 2,000 shares whereas marked applications
were as follows:
A 16,000 shares, B 5,700 shares and C 8,300 shares
(i) Calculate the net liability of each one of the underwriters.

4. Export Ltd. incorporated on 1st January, 2008 issued a prospectus inviting applications for
5,00,000 equity shares of Rs 10 each.
The whole issue was fully underwritten by K, B, D, and M as:
K - 2,00,000; B - 1,50,000; D - 1,00,000; and M - 50,000.
The applications were received for 4,50,000 shares of which marked applications were as follows:
K - 2,20,000; B - 90,000; D - 1,10,000; and M - 10,000.
Find out the liability of individual underwriters.

5. A public limited company, with a capital of Rs. 10,000,00 divided into equity shares of Rs. 10
each, places its entire issue on the market, and the whole issue has been underwritten as follows:
Name of the No. of Shares Name of the No. of Shares
Underwriter Underwriter
Paterson & Co. 30,000 shares Price & Co. 15,000 Shares

Singh & Co. 35,000 shares Talukdar & Co. 2,000 shares

Muzumdar & Co. 10,000 shares Bannerjee & Co. 8,000 shares

All marked forms are to go in relief of the liability of the underwriter whose name they bear. The
applications received on the forms marked by the underwriters are:
Name of the No. of Shares Name of the No. of Shares
Underwriter Underwriter
Paterson & Co. 25,000 shares Price & Co. 1,000 Shares
 Sigh & Co. 23,500 shares Talukdar & Co. 2,000 shares

Muzumdar & Co. 6,500 shares bannerjee & Co. 7,000 shares

Applications for 20,000 equity shares are received on unmarked application forms. Calculate the
liability is to be ascertained not in terms of the original liability ratios but after giving credit for
marked forms.

6. Sardar Ltd. issued to public 1,50,000 equity shares of Rs 100 at par. Rs 60 per share were payable
along with application and the balance on allotment. The issue was underwritten equally by Ali,
Bali and Charlie for a commission of 2.5%. Applications for 1, 40,000 shares were received as per
detailed below:
Underwriters Firm Marked Total
Application application
Ali 5,000 40,000 45,000
Bali 5,000 46,000 51,000
Charlie 3,000 34,000 37,000
Unmarked applications 7,000
Total 1,40,000
It was agreed to credit the unmarked applications equally to Ali and Charlie. Sardar Ltd.
accordingly made the allotment and received the amount due from public. The underwriters
settled their accounts.
You are required to:
Prepare a statement showing the liability of the underwriters and;
Journalize the above transactions (including cash) in the book of Sardar Ltd.

7. Alpha Chemicals Limited planned to set up a unit for manufacture of bulk drugs. For the purpose
of financing the unit the Board of Directors have issued 15,00,000 equity shares of Rs.10 each.
30% of the issue was reserved for promoters and the balance was offered to the public. Aditya,
Diwan and Anoop have come forward to underwrite the public issue in the ratio of 3:1:1 and also
agreed for firm undertaking of 30,000; 20,000 and 10,000 shares, respectively. The underwriting
commission was fixed at 4%. The amount payable on application was Rs.2.50 per share. The
details of subscriptions are:
Marked forms of Aditya 5,50,000 Shares
Marked forms of Diwan 2,00,000 Shares
Marked forms of Anoop 1,50,000 Shares
Unmarked forms 50,000 Shares
You are required to show the allocation of liability among underwriters with workings.
i) Pass journal entries in the books of Alpha Chemicals Limited:
ii) For underwriters’ net liability and the receipt or payment of cash to or from underwriters.
iii) Determining the liability towards the payment of commission to the underwriters.

8. Delta Ltd. Issued 25,00,000 equity shares of Rs. 10 each at par. 7,00,000 shares were issued to
the promoters and the balance offered to the public was underwritten by three underwriters P, Q
& R in the ratio of 2:3:4 with firm underwriting of 50,000, 60,000 & 70,000 shares each
respectively. Total subscriptions received 13,88,000 shares including marked application and
excluding firm underwriting. Marked applications were as follows:
P 3,00,000 shares, Q 3,50,000, R 4,50,000
Unmarked & surplus applications to be distributed in gross liability ratio.
Ascertain the liability of each underwriter.
9. Scorpio Ltd. came out with an issue of 45,00,000 equity shares of Rs 10 each at a premium of Rs 2
per share. The promoters took 20% of the issue and the balance was offered to the public. The
issue was equally underwritten by A & Co; B & Co and C & Co. Each underwriter took firm
underwriting of 1,00,000 shares each. Subscriptions for 31, 00,000 equity shares were received
with marked forms for the underwriters as given below:
N a me o f t h e U n d e r w r i t e r No. of Shares
A&Co. 7,25,000 shares
B&Co. 8,40,000 shares
C&Co. 13,10,000 shares
Total 28,75,000 shares
The underwriters are eligible for a commission of 5% on face value of shares. The entire amount
towards shares subscription has to be paid along with application.
You are required to:
(a) Compute the underwriters liability (number of shares);
(b) Compute the amounts payable or due to underwriters; and
(c) Pass necessary journal entries in the books of Scorpio Ltd. relating to underwriting.

10. Norman Ltd issued 80,000 equity shares which were underwritten as follows:

Mr. A 48,000 equity shares

Messrs B & Co. 20,000 equity shares
Messrs C Corp. 12,000 equity shares
The above mentioned underwriters made applications for 'firm'
underwritings as follows:
Mr. A 6,400 equity shares
Messrs B & Co. 8,000 equity shares
Messrs C Corp. 2,400 equity shares
The total applications excluding 'firm' underwriting, but including marked 40,000 equity shares.
applications were for
The marked applications were as under :
Mr. A 8,000 equity shares
Messrs B & Co. 10,000 equity shares
Messrs C Corp. 4,000 equity shares
(The underwriting contracts provide that underwriters be given credit for 'firm' applications and
that credit for unmarked applications be given in proportion to the shares underwritten.). You
are required to show the allocation of liability. Workings will be considered as a part of your
answer.

11. Ajinkya Limited recently made a public issue in respect of which the following information is
available:
a) No. of party convertible debentures issued 2,00,000, face value ad issue price Rs. 100 per
debenture.
b) Convertible portion per debenture 60%, date of conversion on expiry of 6 months from the
date of closing issue.
c) Date of closure of subscription lists 1.5.2011, date of allotment 1.6.2011, rate of interest on
debenture 15% payable from the date of allotment , value of equity share for the purpose of
conversion Rs. 60 (face value Rs. 10)
d) Underwriting commission 2%.
 e) No. of debenture applied for 1,50,000.
th st
f) Interest payable on debentures half-yearly on 30 September and 31 March.

12. Bhagavat limited, came out with a public issue of share capital on 01.01.2011 of 10,00,000 equity
shares of Rs. 10 each at a premium of 5%. Rs.2.50 is payable on application (on or before
31.01.2011) and Rs. 3.00 on allotment (31.03.2011) including premium.
Issue is underwritten by two underwriters –Alok and Bhujbal equally, the agreed commission
being 5% of the issue price. Each of the underwriters underwrites 20,000 shares firm.
Subscription totaled 9,60,000 shares, the distribution forms being
Alok – 5,20,000, Bhujbal - 3,60,000 and Unmarked forms- 80,000.
One of the allottee (using forms with the name of Alok) for 2,000 shares, fails to pay the amount
due on the allotment, all other money due being received in full including any due from the
shares developing upon the underwriters. The commission due is paid separately.
The shares of the indifferent allottee are finally forfeited by 30.06.2011 and re- allotted for
payment in cash of Rs. 4 per share. You are required to pass summary journal entries to record
the above events and transaction( including cash )

13. X Ltd. issued 10,000 shares of Rs 100 each at a premium of Rs 15 each. 90% of the issue was
underwritten by M/s Broker and Co. at a commission of 1% on the nominal face value.
Applications were received for 8,000 shares and allotment was fully made. All the amount due
from allotments was received in one installment. The accounts with Broker & Co. were settled.
Show the Journal entries to record the transaction.

14. X Ltd. issued 1, 00,000 equity shares of Rs 10 each at par. A & Co. agreed to underwrite 80% of
the whole issue. Applications were received for 70,000 shares out of which applications for
50,000 shares were marked. Determine the net liability of A & Co.

15. A entered into an underwriting agreement with B Ltd. for 60% of the issue of 15% Rs 50,00,000
debentures with a firm underwriting of Rs 5,00,000. Marked applications were for Rs 35, 00,000
debentures. Calculate the liability of the underwriter and the commission payable to him.

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