Fixed Price Offering

Under fixed price, the company going public determines a fixed price at which its shares are
offered to investors. The investors know the share price before the company goes public.
Demand from the markets is only known once the issue is closed. To partake in this IPO, the
investor must pay the full share price when making the application.

Book Building Offering

Under book building, the company going public offers a 20% price band on shares to investors.
Investors then bid on the shares before the final price is settled once the bidding has closed.
Investors must specify the number of shares they want to buy and how much they are willing
to pay. Unlike a fixed price offering, there is no fixed price per share. The lowest share price
is known as the floor price, while the highest share price is known as the cap price. The final
share price is determined using investor bids.

Book Building Meaning

Book Building is a process that helps companies discover the price of its security when its
shares are being offered for sale in an IPO with the help of investment bankers and is
recommended by major stock exchanges and regulators because it is the most efficient
mechanism to price securities in the market.

How does the Book Building Process Work?

When a company has planned to list its shares on the stock exchanges for the first time via IPO,
the company management has to decide various things to get its share listed on the stock
exchange such as issue size, share price, etc. and to get through all this process; first company
management has to appoint underwriter to help in the listing process.

Let's see in the detail each step involved in the book-building process.

1. Hiring Underwriter

Firstly, the Issuing company needs to hire an Investment bank that acts as an
underwriter. With the help of issuing company management, the Investment bank
identifies the size of the issue and determines the price range of the securities. An
Investment bank drafts the company prospectus, which includes all the relevant details
about the issuing company such as financials, Issue size, Price range, future growth
perspectives, etc. The price range of share consists of floor price (Lower end of the
price range) and Ceiling price (Upper end of the price range).

2. Investor's Bidding

Investment bank invites investors. Usually, these are high net-worth individual & fund
managers to submit their bids on the number of shares they are willing to buy at the
various price level. Sometimes, it is not a single investment bank that underwrites the
entire issue. Rather, the lead investment bank is engaged with other investment banks
who use their networks to tap a large number of investors for the bidding process.

3. Share Pricing
 After all the bids are collected by the investment bank at
different price levels, they
evaluate the aggregate demand for the issue from the submitted bid. To price the share
of the issue, the underwriter uses the
weighted-average method to arrive at the final
price of the share. This final price is also known as "Cut-off price.' If there is a good
response for any issue by investors, the Ceiling price is usually a 'Cut-off" Price."

4. Biding Process Transparency

Most of the regulators andthe stock exchanges
in the world require companies to make
public the details of the bidding process. It is an underwriter duty to publicize the details
of the bids submitted by the investor to
purchase the shares of the issue.
5. Allotment & Settlement

Lastly, the allotment process begins by allocating the shares of the issue to the
bidders. Now, as you know, initially, investors had bid for this issue at the accepted
different
price range, but the settlement process ensures that all allotments happen at the cut-off
price of this issue. An investor who had bidden in excess to cut off price, their excess
money is returned, and investors who had bidden less than the cut-off price, investment
bank ask them to pay the difference amount.

Advantages of Book Building

The following the advantages of the

are
book-building process over a fixed price mechanism.
The most efficient way to price the share in the IPO market;
The price of the share is finalized by the aggregate demand by investors, not by the
fixed price set by the company management.

Disadvantages of Book Building

The following are the disadvantages of the book-building process over the fixed-price
mechanism.

.
High cost involved in the book-building process as
compared to the fixed-price
mechanisin;
The time period is also more in the book building process as compared to the fixed-
price mechanism.

Important Point to Remember

Book Buildingis a process of discovering the price of the security that being offered
for sale in an IPO market.
The Price range of security consists of Ceiling price (Upper end of the price) & Floor
price (Lower end of the price).
The final price at which shares are allocated to investors is known as Cut-off Price.

Conclusion

Book building is one of the most efficient mechanisms by which companies, with the help of
the investment banker, price their share in IPOs, and also it is recommended by all the major
stock exchanges and regulators. It also helps investors to value the price of the shares by
submitting the bids to the underwriter, which is not possible if the company chooses a fixed
price mechanism to price its share.

A public limited company gets its equity capital from the investment made by the
shareholders. Hence the shareholders expect a return on their investment. The company can
do the same either by declaring cash dividends or bonus shares. Bonus shares are
accumulated profits that a company distributes to the current shareholders as free shares.
There are no additional costs involved, and the shares are given the basis of the current
holding of shareholders.
Cash dividends are actual transactions, and there is a payout involved. However, in the case
of bonus shares, there is no payout, and it is just a book entry where Reserves are capitalized.

Prerequisites For Issue of Bonus Shares

Prior to the issue of bonus shares, there are some conditions that must be ascertained. They
are as follows:

Ensure that the Articles of Association authorizes it, if not then the Articles of
Association needs to be altered in accordance with Section 14 of the Act.
Verify that the authorized capital is sufficient for the issue of Bonus shares. If it is not,
then the Memorandum of Association has to be altered to increase the authorized
capital.
The issue must be authorized at the General Meeting by shareholders.
Ensure there are no defaults in payment of interest or principal of the fixed deposit or
debt security issued
by the company.
The company must also ensure that there are no defaults in payment of statutory dues
to the employees like gratuity, bonus, or contribution to the provident fund.
Ensure that all the shares are fully paid, if not then they must be fully paid
The company must check the availability of all its resources.

Procedure For Issue Of Bonus Shares

The following are the steps to be adhered by the company for the issue of Bonus shares.

1. Call a Board Meeting: The first step to be taken is to call for a Board Meeting. As
per Section 173(3) of the Act, the issue of the notice must be at least 7 days before the
Board Meeting
2. Convene a Board Meeting: The company must then hold the Board Meeting and
place the agenda. To convene the meeting, the following must be ensured:
o Ensure the meeting has the required quorum that is rd of the total strength of
the Board.
Place the board resolution for approving the issue subject to the approval by
shareholders in a general meeting by an ordinary resolution.
Ensure that the resolution is passed.
o The ratio of the bonus shares must be fixed.
Decide the date, time and venue for the general meeting and authorize a
director to send notices for the same.
3. Circulate draft minutes: The draft minutes must be circulated within the stipulated
time to all directors for their comments. For a public company, the board resolution in
 the form MGT - 14 must be filed in less than 30 days with the Registrar of

Companies.
4. of
Send Notice General Meeting: The
notice for
the
General Meeting for
approving
the issue of bonus shares must be sent out to all directors, shareholders, auditors and
all members entitled to receive, giving no less than 21 clear days for the same.
5. Convene the General Meeting: The Extraordinary General Meeting must be
convened, and the issue of bonus shares must be authorized by passing Ordinary
resolution by simple majority as per section l14(1) of the Act and authorize the Board
to allow the bonus shares.
6. Convene a Board Meeting: The company must convene a Board Meeting approving
the allotment of the bonus shares and follow all the protocols for the same.
7. File Form No. PAS -3: The company must then file the return of allotment in the
Form PAS - 3 within 30 days of allotment of securities of the company having a share
capital. The attachments required will be as mentioned here below:
Copy of the Ordinary Resolution passed in the Extraordinary General
Meeting.
Copy of Board resolution approving allotment of shares.
List of allottees mentioning the name, address, occupation if any, anda
number of securities allocated to each of the allottees and the list will be
certified by the signatory of the Form PAS-3.
Any other documents as may be applicable.
8. Issue of share certificates: The company must inform the depository immediately on
allotment when the shares are held in Demat form, if they are held in physical form
then the share certificates must be issued within 2 months from the date of allotment.

Advantages of Bonus Shares

For a company:

I t can help the company to conserve cash by issuing shares in lieu of dividend.
It brings about a balance in the pricing of the share. Since the issue is onlya book
entry, the total shareholding is constant; however, the number of shares has increased.
It brings the share capital in line with the assets employed.
I t helps in the capitalization ofreserves.
For a shareholder:

It increases the investments of the shareholder, and it is tax-free.It assures the

company's policy for long term growth.
It increases the cash dividend receivable in the future, as the number of shares held by
the shareholder has increased.
 6.2 ACCOUNTING

CHAPTER oVERVIEW
BONUS Bonus issue means a issue of free additional shares to
SHARES existing shareholders.
A company may issue fully paid-up bonus shares to its
shareholders out o f
its free reserves;
i) securities premium account or
(ii) capital redemption reserve account

Bonus shares
should not be issued out of revaluation reserves
i.e., reserves created by the revaluation of assets).

RIGHTISSUE Rightsissue is an issue of rights to a company's

existing shareholders that entitles them to buy additional
from the company in proportion to their
shares directly
existing holdings, within a fixed time period. In a rights
offering, the subscription price at which each share may be
is at a discount to the current market
purchased generally
price. Rights are often transferable, allowing the holder to
sell them in the open market. The difference between the
Cum-right and ex-right value of the share is the value of
the right.

G1 ISSUE OF BONUS SHARES

1.1 INTRODUCTION
A bonus share may be defined as issue of shares at no cost to current
shareholders in a company, based upon the number of shares that the
shareholder already owns. In other words, no new funds are raised with a bonuS
issue. While the issue of bonus shares increases the total number of shares issued
and owned, it does not increase the net worth of the company. Although the total
number of issued shares increases, the ratio of number of shares held by each
shareholder remains constant.

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 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.3

Bonus issue is also known as 'capitalisation of profits. Capitalisation o 3/30

refers to the process of converting profits or reserves into paid up capitai. A
company may capitalise its profits or reserves which otherwise are available for
distribution as dividends among the members by issuing fully paid bonus shares
to the members.

If the subscribed and paid-up capital exceeds the authorised share

capital as a
result of bonus issue, a resolution shall be passed
by the company at its general
body meeting for increasing the authorised capital. A return of bonus issue along
with a copy of resolution
authorising the issue of bonus shares is also required to
be filed with the Registrar of Companies.

1.2 PROVISIONS OF THE COMPANIES ACT, 2013

Section 63 of the Companies
Act, 2013 deals with the issue of bonus shares.
According to Sub-section (1) of Section 63, a company may issue fully paid-up
bonus shares to its members, in any manner whatsoever, out o f

(0) its free reserves

(i) the securities premium account; or
(i) the capital redemption reserve account:
Provided that no issue of bonus shares shall be made by capitalising reserves
created by the revaluation of assets.
Sub-section (2) of Section 63 provides that no company shall capitalise its profits or
reserves for the purpose of issuing fully paid-up bonus shares under sub-section (1),
unless

(a) it is authorised by its articles;

(b) it has, on the recommendation of the Board, been authorised in the

general
meeting of the company;

As per Section 2(43) of the Companies Act, 2013, "free reserves" means such reserves which, as per
the latest audited balance sheet of a company, are available for distribution as dividend. Provided
that-
any amount representing unrealised gains, notional gains or revaluation of assets, whether
shown as a reserve or otherwise, or

any change in carrying amount of an asset or of a liability recognised in equity, including

Surplus in proft and loss account on measurement of the asset or the liobility at fair value,
shall not be treated as free reserves

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 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISsUE 6.3

Bonus issue is also known

refers to the process of
'capitalisation of profits'. Capitalisation of profits
as

converting profits or reserves into paid up capital. A

company may capitalise its profits or reserves which otherwise are available for
distribution dividends among the members by
as
to the members.
issuing fully paid bonus shares
If the subscribed and paid-up capital exceeds the
authorised share capital as a
result of bonus issue, a resolution shall be
passed by the at its general
body meeting for increasing the authorised capital. A returncompany
of bonus issue along
with a copy of resolution
authorising the issue of bonus shares is also required to
be filed with the
Registrar of Companies.
1.2 PROVIsiONS OF THE COMPANIES ACT, 2013
Section 63 of the Companies
Act, 2013 deals with the issue of bonus
shares.
According Sub-section (1) of Section 63, a company may issue
to
bonus shares to its members, in fully paid-up
any manner whatsoever, out of-
(i) its free
reserves
(ii) the securities premium account; or

(ii) the capital redemption reserve

account
Provided that no issue of bonus shares shall be made
created by the revaluation of by capitalising reserves
assets.
Sub-section (2) of Section 63 provides that
company shall capitalise its profits or
no
reserves for the purpose of issuing fully paid-up bonus shares under sub-section (1),
unless
(a) it is authorised by its articles
(b) it has, on the recommendation of the Board, been authorised in the general
meeting of the company:

As per Section 2(43)

of the Companies Act, 2013, "free reserves" means such reserves which, as per
the latest audited balance sheet of a
company, are available for distribution as dividend. Provided
that

any amount representing unrealised gains, notional gains or revaluation of assets, whether
shown as a reserve or otherwise, or
(i) any change in carrying amount of an asset or of a liability recognised in equity, including
surplus in profit and loss account on measurement of the asset or the
shall not be treated as free reserves
liability at fair value,

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 6.4 ACCOUNTING

(c) it has not defaulted in payment of interest or principal in respect of fixed

deposits or debt securities issued by it;

(d) it has not defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus;
(e) the partly paid-up shares, if any outstanding on the date of allotment, are
made fully paid-up.
The company which has announced the decision of its Board
once
recommending
a bonus issue, shall not subsequently withdraw the same.
Sub-section (3) of the Section also provides that the bonus shares shall not be
issued in lieu of dividend.
As per Para 39 () of Table F under Schedule I to the Companies Act, 2013, a
company in general meeting may, upon the recommendation of the Board,
resolve-

(a) it is
that desirable to capitalise any part of the amount for the time
being standing to the credit of any of the company's reserve accounts,
or to the credit of the profit and loss account, or otherwise available
and
for distribution, (b) that such sum be accordingly set free for
distribution in the specified manner amongst the members who would
have been entitled thereto, if distributed by way of dividend and in
the same proportions.
(ii) The sum aforesaid shall not be paid in cash but shall be applied, subject to
the provision contained in clause (ii), either in or towards- (a) paying up any
amounts for the time being unpaid on any shares held by such members
respectively (6) paying up in full, unissued shares of the company to be
allotted and distributed, credited as fully paid-up, to and amongst such
members in the proportions aforesaid partly in the way specified in (a) and partly
in that specified in (b) above;
A securities premium account and a capital redemption reserve account
may be applied in the paying up of unissued shares to be issued to
members of the company as fully paid bonus shares. In other words,
securities premium account and capital redemption reserve cannot be
applied towards payment of unpaid amount on any shares held by existing
shareholders.

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 ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.5

As per Section 63(2) of the Companies Act, 2013, bonus shares cannot be issued
unless party paid-up shares are made fully paid-up. Para 39(i) of Table F under
Schedule I to the Companies Act, 2013 allows use of free reserves for paying up
amounts unpaid on shares held by existing shareholders.
On a combined reading of both the provisions, it can be said that free reserves may
be used for paying up amounts unpaid on shares held by existing shareholders
(though securities premium account and capital redemption reserve cannot be used).
1.3 SEBI REGULATIONSs
A listed company, while issuing bonus shares to its members, has to comply with
the following requirements under the SEBI (lssue of Capital and Disclosure
Requirements) Regulations, 2018:
Regulation 293- Conditions for Bonus Issue
Subject to the provisions of the Companies Act, 2013 or any other applicable law,
a listed issuer shall be eligible to issue bonus shares to its members if
a) it is authorised by its articles of association for issue of bonus shares
capitalisation of reserves, etc.:
Provided that if there is no such provision in the articles of association, the
issuer shall pass a resolution at its general body meeting making provisions
in the articles of associations for capitalisation of reserve;
b) it has not defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it;
c) it has not defaulted in respect of the payment of statutory dues of the
employees such as contribution to provident fund, gratuity and bonus;
d) any outstanding partly paid shares on the date of the allotment of the
bonus shares, are made fully paid-up; e) any of its promoters or directors is
not a fugitive economic offender.
Regulation 294 Restrictions on a bonus issue.
(1) An issuer shall make a bonus issue of equity shares only if it has made reservation
of equity shares of the same class in favour of the holders of outstanding compulsorily
convertible debt instruments if any, in proportion to the convertible part thereof.
(2) The equity shares so reserved for the holders of fully or partly compulsorily
convertible debt instruments, shall be issued to the holder of such convertible
debt instruments or warrants at the time of conversion of such convertible debt

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 6.6 ACCOUNTING

convertible instruments, warrants, as the case may

be, on
instruments, optionally
the bonus shares were issued.
the same terms or same proportion at which
securities premium
(3) A bonus issue shall be made only out of free reserves,
and built out of the genuine
account or capital redemption reserve account
securities premium collected in cash and
reserves created by
profits or
revaluation of fixed assets shall not be capitalised for this purpose.
bonus share
(4) Without prejudice to the provisions of sub-regulation (3),
not be issued in lieu of dividends. 6/30
shares
(5) If an Superior Voting Right (SR) equity
issuer has issued
bonus issue on the SR equity shares shal carry
the
promoters or founders, any shares
to ordinary shares and the SR equity
same ratio of voting rights compared

issued in a bonus issue shall also be converted to equity shares having voting
rights same as that of ordinary equity shares along with existing SR equity shares.]
bonus issue.
Regulation 295 Completion of a
its board of directors and
(1) An issuer, announcing a bonus issue after approval by
not requiring shareholders' approval
for capitalisation of profits or reserves for
the bonus issue within fifteen days from the
making the bonus issue, shall implement that where the issuer
board of directors: Provided
date of approval of the issue by its
for capitalisation of profits or reserves for
required to seek shareholders' approval
is
two months
bonus issue shall be implemented within
making the bonus issue, the the decision to
from the date of the meeting of its board of directors wherein
announce the bonus issue was taken subject to shareholders' approval.

For the purpose of a bonus issue to be considered as 'implemented'

Explanation:
the date of commencement of trading shall be considered.

announced, shall not be withdrawn.

(2) A bonus issue, once

1.4 JOURNAL ENTRIES

sanction of issue of bonus shares

(A) (1) Upon the an

Account
(a) Debit Capital Redemption Reserve
Debit Securities Premium Account'

whereas
premium should be realised in cash,
such securities
'As per SEBI Regulations, no such requirement. In
acordance with Section
under the Companies Act, 2013, there is
account of issue of shares other than by way of
cash.
52, securities premium may arise on
realised in cash) may be used for
Thus, for unlisted companies, securities premium (not
be used in case of listed companies.
issue bonus shares, whereas the same cannot
of

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 6.6 ACCOUNTING

instruments, optionally convertible instruments, warrants, the case may be,

as on
the terms
same or same
proportion at which the bonus shares were issued.
(3) A bonus issue shall be made only out of free reserves, securities
premium
account or capital redemption reserve account and built out of the
genuine
profits securities premium collected in cash and
or
reserves created by
revaluation of fixed assets shall not be capitalised for this
purpose.
(4) Without prejudice to the provisions of sub-regulation (3), bonus shares shall
not be issued in lieu of dividends.

(5) If an issuer has issued

Superior Voting Right (SR) equity shares to its
promoters or founders, any bonus issue on the SR equity shares shall carry the
same rati of
voting rights compared to ordinary shares and the SR equity shares
issued in a bonus issue shall also be converted to
equity shares having voting
rights same as that of ordinary equity shares along with existing SR equity shares.]
Regulation 295 Completion of a bonus issue.
(1) An issuer, announcing a bonus issue after
approval by its board of directors and
not requiring shareholders' approval for capitalisation of profits or reserves for
making the bonus issue, shall implement the bonus issue within fifteen days from the
date of approval of the issue by its board of directors: Provided that where the issuer
is required to seek shareholders' approval for capitalisation of profits or reserves for
making the bonus issue, the bonus issue shall be implemented within two months
from the date of the meeting of its board of directors wherein the decision
to
announce the bonus issue was taken
subject shareholders'
to
approval.
Explanation: For the purpose of a bonus issue to be considered as
'implemented'
the date of commencement of trading shall be considered.

(2) A bonus issue, once announced, shall not be withdrawn.

1.4 JOURNAL ENTRIESs

(A) (1) Upon the sanction of issue of bonus shares

an

(a) Debit Capital Redemption Reserve Account

Debit Securities Premium
Account
As per SEBI Regulations, such securities
premium should be realised in cash, whereas
under the Companies Act, 2013, there is no such
requirement. ln accordance with Section
52, securities premium may arise on account of issue of shares other than
by way of cash.
Thus, for unlisted companies, securities premium (not realised in cash)
may be used for
issue of bonus shares, whereas the same cannot be used in cose of listed companies.

O The Institute of Chartered Accountants of lIndia

 not requiring shareholders' approval for capitalisation of profits or reserves for
making the bonus issue, shall implement the bonus issue within fifteen days from the
date of approval of the issue by its board of directors: Provided that where the issuer
is required to seek shareholders' approval for capitalisation of profits or reserves for
making the bonus issue, the bonus issue shall be implemented within two months
from the date of the meeting of its board of directors wherein the decision to
announce the bonus issue was taken subject to shareholders' approval.
Explanation: For the purpose of a bonus issue to be considered as 'implemented'
the date of commencement of trading shall be considered.
(2) A bonus issue, once announced, shall not be withdrawn.
1.4 JOURNAL ENTRIES
(A) (1) Upon the sanction of an issue of bonus shares
(a) Debit Capital Redemption Reserve Account
Debit Securities Premium Account'

As per SEB/ Regulations, such securities premium should be realised in cosh, whereas
under the Companies Act, 2013, there is no such requirement. In accordance with Section
52, securities premium may arise on account of issue of shares other than by way of cash.
Thus, for un isted companies, securities premium (not realised in cash) may be used for
issue of bonus shares, whereas the same cannot be used in cose of listed companies.

The Institute of Chartered Accountants of India

7/30

ACCOUNTING FOR BONUS ISSUE AND RIGHT ISsUE 6.7

Debit General Reserve Account

Debit Profit & Loss Account
(b) Credit Bonus to Shareholders Account.
(2) Upon issue of bonus shares
(a) Debit Bonus to Shareholders Account
(b) Credit Share Capital Account.
(B) (1) Upon the sanction of bonus by converting partly paid shares into fully
paid shares
(a) Debit General Reserve Account
Debit Profit & Loss Account
(b) Credit Bonus to Shareholders Account
(2) On making the final call due
(a) Debit Share Final Call Account
(b) Credit Share Capital Account.
(3) On adjustment of final call
(a) Debit Bonus to Shareholders Account
(b) Credit Share Final Call Account
2 . RIGHT ISSUE
2.1 INTRODUCTION
Provisions of section 62(1) (a) govern any company, public or private, desirous of
raising its subscribed share capital by issue of further shares. Whenever a
company intends to issue new shares, the voting and governance rights of the
existing shareholders may be diluted, if they are not allowed to preserve them. It
may happen because new shareholders may subscribe to the issued share capital
Companies Act, 2013 allows existing shareholders to preserve their position by
offering those newly issued shares at the first instance to them. The existing
shareholders are given a right to subscribe these shares, if they like. However,if
they do not desire to subscribe these shares, they are even given the right to
renounce it in favour of someone else (unless the articles of the company
prohibits such a right to renounce).
In nutshell, the existing shareholdersI ve a right to subscribe to any fresh issue
of shares by the company in proportion to their existing holding for shares. They
have an implicit right to renounce this right in favour of anyone else, or even
reject it completely. In other words, the existing shareholders have right of first

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6.14 ACCOUNTING

refusal, i.e., the existing shareholders enjoy a right to either subscribe for these
shares or sell their rights or reject the offe.

Example
Assume a company makes a right issue of 10,000 shares when its existing issued
and subscribed capital is 100,000 shares. This enables any shareholder having 10
shares to subscribe to 1 new share. Hence X, an existing shareholder holding
1,000 shares, may subscribe to 100 shares as a matter of right. The existing share
percentage of X was 1% (1,000 100,000). If X subscribes these shares, his
percentage holding in the company will be maintained (1,100 1,10,000).
However, if X does not mind his share % diluting (1,000/ 1,10,000), he may
renounce the right in favour of any one else, say Y. Hence, these 100 shares will
be issued to Y, at the insistence of X. X may charge Y for this privilege, which is
technically termed as the value of right._
A company desirous of issuing new shares has to offer, as per Section 62(1) (a) of
Companies Act 2013, the shares to existing equity shareholders through a letter
of offer subject to the
following conditions, namely:
The offer shall be made by notice specifying the number of shares offered
and limiting a time not being less than fifteen days and not exceeding thirty
days from the date of the offer within which the offer, if not accepted, shall
be deemed to have been declined;

Unless the articles of the company otherwise provide, the offer aforesaid
shall be deemed to include a right exercisable by the person concerned to
renounce the shares offered to him or any of them in favour of any other
person; and the notice (referred to in above bullet point) shall contain a
statement of this right
After the expiry of the time specified in the notice aforesaid, or on receipt of
earlier intimation from the person to whom such notice is given that he declines
to accept the shares offered, the Board of Directors may dispose of them in such
manner which is not
disadvantageous to the shareholders and the company.
Exceptions to the rights of existing equity shareholders
Section 62 recognises four situations under which the further shares are to be issued
by a company, but they need not be offered to the existing shareholders.
The shares can be offered, without being offered to the existing shareholders,
the provided
company has passed a special resolution and shares are offered accordingly.

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 6.20 ACCOUNTING

xample:
A company having 100,000 shares of 7 10 each as its issued share capital, and
having a market value of F 46, issues rights shares in the ratio of 1:10 at an issue
price of 31.
The entry at the time of subscription of right shares by the existing shareholders
will e

Bank A/C Dr. 3,10,000

To Equity Share Capital A/c 100,0
To Securities Premium A/c 210,000
2.2 ADVANTAGES AND DISADVANTAGES OF RIGHT ISSUE

Advantages of right Issue

. Right issue enables the existing shareholders to maintain their proportional

holding in the company and retain their financial and governance rights. It
works as a deterrent to the management, which may like to issue shares to
known persons with a view to have a better control over the company's affairs
2 In well functioning capital markets, the right issue necessarily leads to
dilution in the value of share. However, the existing shareholders are not
affected by it because getting new shares at a discounted value from their
cum-right value will compensate decrease in the value of shares. The cum-
right alue is maintained otherwise also, if the existing shareholders
renounce their right in favour of a third party.
3. Right issue is a natural hedge against the issue expenses normally incurred
by the company in relation to public issue.
4 Right issue has an image enhancement effect, as public and shareholders
view it positively.
5. The chance of success of a right issue is better than that of a general public
issue and is logistically much easier to handle.

Disadvantages of right issue

1. The right issue invariably leads to dilution in the market value of the share
of the company.
2. The attractive price of the right issue should be objectively assessed against
its true worth to ensure that you get a bargained deal.

The Institute of Chartered Accountants of India

CA IPCC Advanced Accounts
Anand R Bhangariya 8600320000
Underwriting Of Shares And Debentures

UNDERWRITING OF SHARES AND

DEBENTURES
1.INTRODUCTION
Underwriting is an agreement, with or without conditions, to subscribe to the
securities of a company when existingg 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 144){b), it is required that if the company is not able to collect 90% of
theoffer amount,thenit needsto compulsorily return the moneyto those
lot of issue
who have subscribed to theshares
and
uncertainty could be avoided by the help of a
causing This expenses to go waste.
specialised group of risk-redeemers called
Underwriters.

2. UNDERWRITING COMMISSION

I t may be paid in cash orin 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% ofthe issue price of the debentures
*Underwriting commision is not payable on the amounts taken up by the promoters,
employees, directors, their friends and business associates.
Commissionis 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 underwrting 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 cose of Sole Undewritin9.

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In such a case, the distinction between marked and unmarked

applications is not of such significance.

3.2. Joint Underwriters

rhe 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,
8, C, D in the rotio of 2:2:1:1, it is the cose 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 glven 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 irespective of the number of shares subseribed 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. s underwritten as follows
A 1,60,000 Shares (Firm Underwriting 3,600 Shares)
B1,60,000 Shares (Firm Underwriting 2,000 Shares)
c80,000 Shares (Firm Underwriting 1,200 Shores)
D80,000 Shares (Firm Underwriting 10,000 Shores)
In this case only 4,63,200 shores (ie. 4,80,000 shares firm underwriting of 16,800
shares) will be offered to public and 16,800 shares will be token by the underwriters even
if the issue is oversubscribed.

The benefit of firm underwriting may be given either

To on individual underwriter on the basis of his individual firm underwriting, or

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T o all the underwriters in the ratio of their gross liobility

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 L
of individual underwriter. Received by
underwriter) Company directiy) Credited to Credited
individual To all
Credited to Distributed underwriter
Individual among all the
underwriter underwriters
Depending upon the
condition / requirement of
underwriting agreement

Types of Applications Treatment for different types ofapplication

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

Unmarked (Do not bear any reatment No.2_Unmarked applications are always distributed
stamp of underwriter. among all the underwriters
Received by om ny
directly)
Firm Underwriting Treatment No.3 The applications for the firm shares are either

Applications
underwriters made by the
themselves) Treatment
credited to indhvidual underwriter (ie.
to all (i.e. Treatment No.2)
No.1) credited
or
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.

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For Example, X Ltd. Decided to moke a public issue of 1,00,000 equity shares of Rs. 10 each
which is entirely underwriter by A, B, C Din the ratio
of2:2:1:1
In such case, the benefit of unmarked opplications is given to the underwriter in the ratio
of their gross liobility.

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 ore underwritten by A, 8, C, D in the rotio of 2:2:1:1. It meons
10,000 shores ore 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 underwriterss

Figures No,ofshares)
No Particulars Basis B

A Grossliability Ratio of Shares X*X XXX

Underwritten
B Less: Marked applications (excluding Actual XXX XXX

firm underwriting)
C Balance [A-B] XXX XXX

D Less: Unmarked applications allotted Ratio of Gross Liability XXX XXX

in the ratioof grossliability

Balance [ C-:D] XXX XXX

Less: Firm underwriting Actual or Ratio of Gross XXX XXX

Liability
Net Liability as per agreement( if no KAX XXX

balance is negative) [ E-F]

H
Add: Firm underwriting XXX XXX

Total liability XXX **X

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