Underwriting of Shares and Debentures ny Raker ore rae BPE LR — Cay 26 vast Seegty Reprcente Heues CHP, n underwriter in which underwriter agrees to take shares and debentures which will not be subscribed by th is i c esha lic. Us ‘aking financial risk for a fee may be an individual or institution of frames a er Inicase of issue of shares during initial Public offerings, underwriting be Is ¢ sin comes compulso for arrangingthe-“aMOURT of minimum subscription. Alter undermine hbo eee, responsibility of the underwriter to sell all the shares. In case of shares not being subscribed fully by the public, the underwriter agrees to take up the balance. Thus, underwriting is a ¢ of insurance against under-subsaphon UniSevioe Peal receive undereciing 3 fae commission from the issuing company but they can also eam profits by selling the underwritten shares to investors. Generally, underwriting happens behind the scenes, but it is a crucial aspect of public issue of shares and debentures and it is considered as a key function in the financial world. aes dito Underwriting _ (a) Underwriter : It refers to the person or institution who underwrites the new issue of shares/debentures. : (b) Underwriting : ‘Underwriting’ refers to a function performed by an underwriter. It is required when a company issues shares or debentures for thé first time, i.e. IPO or «subsequently when it is in need of working capital. fens A (©) Underwriting Agreement : Underwriting isa ct. een a company ani underwriters: who undertake to take up the whole or a part of such of the offered shares/debentures as may not be subscribed for by the public. Such agreements are called ‘Under-writing agreement’. ; es (d@) Underwritin; Comuaisolonied + Commission paid to underwriters for Lea oatopel is known as “Underwriting ‘Commission’. It is calculated as a percentage of shares or debentures issued to the public. (e) Minimum Subscription : A public company eennotalatsharey tess the amount of gu subscriptions ned se Po SE pels 9 company must receivea 7 inimnurn subscription o of the issued amount within 60 days from i i have to refund the entire subscription the date of closure of the issue, otherwise the Lae rm ihe ost aay i to : ithi: scribed riod of 8 days eS men be imposed for the delayed period. Scanned with CamScanner42 Corporate Accounting ‘Certificate of Commencement of Business’ will not be Sranteq tng Itis important to note that it Om subscriptions from the public, public company until it receives I 4.2. Types of Underwriting 4.2.1 Complete Underwriting ; ae isgue of shares/debentures of a company are underwritten either fitch ee aba of underwriters, it is called complete underwriting. In a ofa single underwriter the liability of the underwriter is equal to the number of securig underwritten minus securities applied for. In case of more than one underwriter also 4, “IRBIY is calculated in the Similar fashion, re Tibility of the underwriters is equal io number of securities underwritten by them individually minus securities applied for, Following two points are important in this regard - (. Underwriter gets full commission whether the issue is fully ‘subscribed or ov. subscribed. id % (ii) In case of under subscription of issue, the underwriter is required to subscribe fortty balance of shares, i.e. underwriter/s will meet the deficiency in whole. 4.2.2 Partial Underwriting When only a part of the issue is underwritten, itis known as partial underwriting, ¢g.61% of the whole issue is underwritten. In such cases, it is assumed that the company itself has {aken.the responsibility to underwrite the balance of shares, Partial underwriting may invoke one underwriter or number of underwriters. Example 1: Y Ltd. issued 10,000 shares; this issue was fully underwritten by Mr. Ravi Total 8,500 applications were received from the public. ‘The liability of Ravi will be calculated as under: Gross Liability 10,000 Less : Marked Applications (8,500) -Net Liability of Underwriter 1,500 Example 2: X Ltd. issued 10,000 shares and 40% thereof i i = x Lt Y % is underwritten by Mr. S On 7500 applications received, the marked applications are 3000 : The liability of Sachin will be calculated as under; Gross Liability of Sachin (40% of 10,000) 4,000 Less : Marked Applications 3,000 (Net Liability of Underwriter 00 Nole: 2 i (4 tet tcc the stamp of an undetwriter. Refer Para 4.6, for detailed discussion) iter does not get credit against the unmarked "Scanned with CamScannerUndercoriting of Shares and Debentures a3 4.2.3 Joint Underwriting Jn case of a large issue the issuer company itself appoint more than one underwriter, eg. Kishan and Sudama underwrite 10,000 shares of X Ltd. in 4:1, this underwriting will be termed as joint underwriting. Note : In case of joint underwriting — (a) The unmarked forms are given to the underwriters in the ratio of their gross liability (4:1 in the given case). (b) After, giving marked forms to underwriters, the surplus if any is distributéd as per gross liability ratio of underwriters. 4.2.4 Sub-Underwriting Sub-underwriter is a person or institution which underwrites an issue, by taking the shares/ debentures from the principal underwriter. Sub-underwriting is done to minimise and diffuse the risk involved in underwriting. In this case, underwriter and sub-underwriter maintain the relationship, which is similar to an agent and sub-agent. Here, sub-underwriter has no connection with the company and he gets commission from the underwriter and remains liable only to him. 4.2.5 Firm Underwriting Firm underwriting is an agreement under which the underwriters agree to take up a specified number of shares/debentures even if the issue is over subscribed. Following points are important in this regard - () Shares/debentures to be purchased under firm underwriting are in addition to the shares/debentures that underwriter has promised to subscribe under the underwriting agreement. (i) In case of oversubscription, underwriters are given priority over the general public regarding allotment of shares. nefits of Underwriting | (@) Underwriting ensures that the company’s issue: of shares/debentures will be fully Subscribed, thus underwriting acts as an insurance policy. (&) Underwriting helps the company in successfully fulfilling the requirement of minimum subscription, (©) It facilitates wider distribution of securities. 2 (d) Underwrites being professionals provide expert advice to companies wart. issue of Securities, Note : Underwriting services are required in the following industries — (@) Mortgage industry, () Insurance industry, (© Banking industry, (a) Stock markets, and (¢) Debt security trading. Mit Scanned with CamScanner44 [44 Provisions! j met - _ ~ i m to ‘ (1) According to Section 40(6), a company may pay. Coeuch con ditions Person a connection with the subscription to its securities subje May be prescribed. . 2) According to Rule 13 of the Companies (Prospectus and -Allotnente Secu Rule, 2014, a company may pay commission to any person in conection with subscription or procurement of subscription to its secur ies, solute oy conditional, subject to the following conditions, namely: fi. of. (@) The payment of such commission shall be authorized in the company's artces y association; . . . (b) The commission may be paid oitt of proceeds of the issue or the profit of the company or both; : The rate of commission paid or agreed to be paid shall not exceed, in case of share, @ 5% ofthe price at which thesharesare issued ora rate authorised by the articles, whickew is less, and in case of debentures, shall not exceed 2.5% of the price at which te debentures are issued, or as specified in the company’s articles, whichever is es The prospectus of the company shall disclose - (®) The name of the underwriters; (ii) The rate and amount of the commission payable to the underwriter; and (iii) The number of securities which is to be underwritten or subscribed by the underwriter absolutely or conditionally. (e) There shall not be paid commission to any underwriter on securities which arenct offered to the public for subscription; (£) Acopy of the contract for at the time of delivery of Note: (@) No underwriting commission is pai q . eign ion is paid on the shares/debentures taken up by the promote. ISyanioaah mm i 5 the publi orasacpion nal Pt on charesdebentures which arent fe ® Corporate Accounting @ the payment of commission is delivered to the Registat the prospectus for registration. the b (a) For Commission or Brokerage due : Underwriting Comm,/Brokerage on Issue of To Underwriter’s/Broker’s A/c (Individual }00ks of the company: Securities A/e Dr. ly) ‘ (b) For acquiring any liability, i.e. for takin zi nde” subseribtion ty, 8 Shares/debentures in case of 1! Underwriter’s A/c (Individually) Dr. To Share Capital/Debentures A/c 7 Scanned with CamScannerUnderwriting of Shares and Debentures 45 (© For Commission/Brokerage paid : Underwriter’s/Broker’s A/c (Individually) Dr. To Bank/Shares/Debentures A/c (a) For receiving payment: Bank A/c Dr. To Underwriter’s A/c (Individually) IWustration 1 : [Calculation of Commission] | X Ltd. issued 50,000 equity shares of € 10 each at 30% premium and 20,000 9% Debentures | of 100 each at a discount of 5%. The issue was underwritten and commission is required to be paid as allowed by the Companies Act, Calculate the commission and pass accounting entries for payment of underwriting commission. Solution: According to provisions of Companies Act; 2013 the rate of commission, in case of shares will be 5% of the price at which the shares are issued, and in case of debentures, 2.5% of the price at which the debentures are issued. Commission on issue of Equity Shares = 50,000 x Z 13 x 5% = 32,500 Commission on issue of 9% Debentures = 20,000 x 95 x 2.5% = 47,500 Accounting Entries : To Particulars Fl Dr @) ch®@ (@) [For commission due - Commission A/c Dr. 80,000 To Underwriters A/c 80,000 (©) | For payment of commission — Underwriters A/c Dr. 80,000 To Bank A/c 80,000 “Types of Underwriters: The underwriters in India may be classified into 2 categories- (@) Institutional underwriters - LIC, IDBI, IFCI, ICICI, UTI, ete. (0) Non-Institutional underwriters — Brokers or any NBFC. x Serna eae USNs ana Unmarked Applications « For better understanding, these two terms may be equated with stamped and unstamped | apbycttions. Thus, marked applications bear the stamp of an underwriter. Unmar | PPlication does not carry any seal or stamp of any underwriter and these applications directly | to the company. Following points are important in this regard — d and Unmarked Applications ; Generally, the shares/debentures issued by @ are underwrit are of underwater in an agreed ratio. Each’ peer he m inorder to reduce the risk of liability. Through n ith the underwriters company can distinguish Scanned with CamScanner46 the for exact are those applications which are dire Corporate Accounhins ms of one underwriter from that of the of el ived through a pal mumber of applications recived Hove = Py involvement of the underwriters. (i) (ii) (iii) If the shares doe ill use his own stamp. Ite the cor through which the application has origins Marking of application is very impor! one underwriter for its issue. (a) Ascertaining the amount of com ission payable to each underwriter. (b) Finding the individual liability of the underwriters for unsubscribed shar, a debentures. thers. It also facilitates the Company to fing rticular underwriter. Unmarked applic the company from the public, withoy, ay i i derwriters, each unde, >) derwritten by different un ; crables the company to identify the name of the un cer tant in case the company has engaged more Tn such case marking helps in — Applications received directly by the company. ie, unmarked applications are divits amongstall théunderwriters involved in the ratio of their gross liability, thus unmate| applications are utilised for reducing the individual liability of each underwriter. (ia) The distinction between marked and unmarked application is immaterial in case o- (a) Involvement of only one underwriter. (&) When the issue is fully subscribed. Illustration 2 : [Whole Issue Underwritten by One Underwriter] X Ltd. issued 15,000 shares of & 10 each, underwritten by Mr. Mohan @ 5% commissic Applications received from public for 12,000 shares. You are required to determine t underwriters liability and pass journal entries in the books of company. Solution : Journal Entries SLNo, Particulars Dae] &® 1 [Bank Ale " Dr. 1,20,000 (0 To Share Application and Allotment A/c a > Gone share application and allotment money received) ire Application and Allotment a To Share Capital A/c als Dep 7 120001 ay (Being she icatic . vat te iare application and allotment money transferred to share capital 3. [Mohan Aye ' gi Share Capita Ale RE s oe ant ing 3,000 shares allotted to Mr, Mohan 7 ws a due to sh iptic 4 | Underwriting Commission A/c sntecripon) 7,500 ‘ To Mohan A/c : oe ‘ “a (Being underwritin commissic , oe ™ s (ees mission payable to Mohan © 5% on 1,50,000) , To Mohan A/e Oe 2m) ae (Being balance amount received from Mr. Mohan) — Scanned with CamScannerro oo Underwriting of Shares and Debentures a7 Working Notes: | Total issue of shares 15,000 shares | Less: Application received 12,000 shares | Net liability of underwriter "3,000 shares Mlustration 3 : [Partial Underwriting and Marked Application] Mahan Ltd. issued 75,000 shares of % 10 each. Sekhar underwrote 80% of the issue. Total Jications received were for 62,000 shares, including marked application for 38,000 charee. apFlore required to calculate liability of the underwriter. Solution : Calculation of Underwriters Liability : (Fig, No. of shares) = Particulars Sekhar _| Mahan Ltd. a Total Liability a 60,000 75,000 Oe" Less : Marked Applications (38,000) % sss: Unmarked Applications =| 2-24, 000/12- 22,000] -f9,000)>% Surplus transferred to Underwriter (9,000) | 7” 9,000 ‘Net Liability 13,000] f Nil Note: v (i),20% of the total issue will be assumed to be underwritten by company itself. ste SAK ‘Unmarked application = Total application received Less Marked application Gera a ae = 62,000 - 38,000 = 24,000 shai x= res —. Illustration 4 : [Joint Underwriting] NRC Ltd. issued 2,00,000 equity shares, The whole issue was underwritten as follows - A-40%; B 30% and C 30% Applications for 1,50,000 shares received in all out of which applications for 40,000 shares bad the stamp of A those for 20,000 shares had of B and 40,000 shares had that of C. The ae B applications for 50,000 shares did not bear any stamp. Show the liability of the R Vo peek 0 SP) a Raanteed’e MUP Solution : -(vtat- oe s oo . re apt Statement Showing Liability of Underwriters (* / (Fig, No. of shares) __ Particul x B C]__ Total “SUB GQ 30,000 60,000) 60,000 —2,00,000 ‘Marked Application 40000 @neco,|_sgo00 | 0000 20,000 Less +, Pred ~ Morte ol 40,000| 40,000 7 ,00,{ Reta tked Application (4:3:2) (WNi (20,000) | (15,000) | (15,000) | _ (50,000) we of Underurfigg ean Sam 25,000 5,000] 50,000 OU, : Unmarked application = Total application received Less Marked application Une = 1,50,000 — (40,000 + 20,000 + 40,000) = 50,000 shares irked applications are distributed in the ratio of gross liability. Scanned with CamScannerCorporate Accounting 48 Alternative Solution : lig. No.of, Statement Showing Liability of Underwriters g x is x . of th Particulars. oy Sr a at ant +00) nate) cae dou Less : Marked Application £0000) aD | 20000] 1A ication (4:8 000) | (10,000) | _(50, Less : Unmarked Application (4:42) (WN) (20,000) | (20, 1009, Net Liability of Underwriters 20,000] 20,000] 10,000] _s00% ‘Note: (Unmarked application = Total application received Less Marked application = 1,50,000 - (40,000 + 20,000 + 40,000) = 50,000 shares (i) Unmarked applications are distributed in the ratio of net liability, ratio of liability after credit marked application. along with the solution, w.rt the ratio used to divide the unmatiel iii) Suitable note must be given applications. Illustration 5 : [Calculation of Liability of Underwriters] ed prospectus inviting applications it Newton Ltd. incorporated on Ist January, 2019 issu 20,000 equity shares of & 10 each. The whole issue was fully underwritten by A , Band C# follows: A 10,000 shares wi fe cali B 6,000 shares 5.3524 way, c 4,000 shares y where “Applications were received for 16,000 shares of which marked applications follows: A 8,000shares nn *2\P> Bi 48 2,850 shares c 4,150 shares ‘You are required to find out the liabilities of individual underwriters. [CA Modis Solution : Statement Showing Liability of Underwriters , Gross (632) ew 3 Less : Marked Application ‘enon es Less : Unmarked Application (63:2) fool aon Lan phasis divided between A and’ | 00 aya in (5:3) io)? Not Liability of Underwriters 213) 131) : 2,719 Note: (i) Unmarked application = Total application recei sived Less Marke pas 1600-7 LOEe Scanned with CamScannerUnderwriting of Shares and Debentures 49 ment 0 ly a eee = as explained in Para 4.2.5. firm underwriting refers to an agreement under which the As iors agree to take up a specified number of shares/debentures even ifthe issue is over wieribed. Following are two alternative ways to treat firm underwriting ~ (a) When benefit of firm underwriting is not given to the individual underwriters, and (b) When benefit of firm underwriting is given to the individual underwriters. 47:1, When Benefit of Firm Underwriting is not given to the Individual Underwriters Following steps are followed to find the individual liability of underwriters: Step 1 Find Gross Liability of individual underwriters along with the ratio of gross liability. Step 2 Subtract marked applications (excluding firm underwriting) from the gross liability of individual underwriters, now the resultant figure may be negative or positive. Negative figures should be added together and the total is divided and distributed among the underwriters in the ratio of gross liability. Step 3 Now, calculate the number of Unmarked Applications by following the approach given below — Particulars No. Total Subscriptions (Excluding Firm Underwriting) “ Less : Marked Applications (Excluding Firm Underwriting) {cy Unmarked Applications by the Public ” Add: Applications under Firm Underwriting eal Total Unmarked Applications oh Now, divide the above calculated unmarked applications in the ratio of Gross Liability. The resultant figure may be Negative or Positive. * Incase of negative figures proceed to Step 4. * Positive or Zero figures represents net liability as per agreement. In this case, go to step 5, i. skip step 4) Note : Under this approach securities under firm underwriting is treated as unmarked applications and Alivided inthe rato of gross liability. Step 4 Find total ofall the negative figures and divide iamong the underwriters having Positive figure in the ratio of their gross liability. This process is repeated until all the figures become non-negative. Non-negative figures arrived at this stage represent the net liability of underwriters as per underwriting agreement. After Step 5 Completion of this step move to step 5. _ *P5 Now, add the securities undertaken as firm underwriting with the net liability to find total liability. Thus, net liability consists of net liability as per underwriting Waste nt 4 the number of securities under firm underwriting. “stration 6 : [Benefit of Firm Underwriting is Not Given to the Individual Underwriters] toyetteat Ltd. issued 25,00,000 equity shares of € 10 each at par. 7,00,000 shares were issued omoters and the balance offered to the public was underwritten by three underwriters ’ Scanned with CamScanner4.10 Corporate Accounting iting of 50,000, 60,000 and 70,000 shares gg i 0 of 2:3:4 with firm underwriting of 50,000, 60,001 a chan ae metre ae oat vies for 13,88,000 shares ineuding mai PPlicating and excluding firm underwriting, Marked applications were ; } and R 4,50,000 , ai) Tete a to be distributed in gross liability ratio. Ascertain the inmarl liability of each underwriter assuming that the benefit of firm underwriting is not given, Otte individual underwriters. Solution : | Statement Showing Liability of Underwriters 7 3 Cig. Ne. of Sh Particulars oll Less : Marked Application (WN2) 10,000 2.50000 “Sse : Unmarked Application (WN3} 4,04,000) | (1,56,000) | (2,08,000) | (4,680 1s Unmarked Application (WN) ( 4,000) 94,000] 1,42,000] 2.23000 Tess ‘Surplus of P tobe allocated inQ & Rin 3:4| _4¢4.0 (1,714)| _ (2,286) = Net liability of as per underwriting agreement —| 92,286] 1,39,714| 23200 Add : Firm Underwriting 50,000} _60,000| 70,000} 1.80.00 Total Liability 50,000 2,719 | 152,286 [4.12000 Note: (1) Gross Liability = Total Shares Less Shares issued to Promoters = 25,00,000 -7,00,000 = 18,00,000 @) Total marked applications (P,Q & R)=3,00,000 + 3,50,000 + 450,000 = 11,00,000 _, © Calculation of unmarked application | Total application received 13,88,000 ss: Total marked applications received (21,00,000) a, Unmprked application by the Public 2,88,000 v Xp fla ‘Application under firm underwriting (50,999 -)- 1,80,000 otal unmarked applications 20°? 468,000 Total unmarked application will be allocated in the Tat of Bross lability. (4 Werification) Total allocation of shares ; = Shares applied by "Y Public (Unmark: od iabili = 288000710000 vatapar egmatked) + Liability of un 4.7.2 When Benefitof Firm U; Following steps are followed Step 1 Find Gross Liability liability. Step 2 Subtract marked liability of indivi Positive. Neg distributed ai \derwriters nderwriting ig Siven to the In ‘0 find the individual liability of of individual underwriters alo, ters dividual Underwrit® underwriters: 08 Ng with the ratio of & Applications (exctudin, i 4 | 8 firm i ae sil nn ae rn gar a | rid,be added together 1 is divides mong the underwriters in the ratio of Bross leita 3 Scanned with CamScannerUnderwriting of Shares and Debentures 411 Step 3 Now, calculate the number of Unmarked Applications by following the approach given below - i Particulars otal Subscriptions (Excluding Firm Underwriting) No. Less : Marked Applications (Excluding Firm Underwriting) * Unmarked Applications by the Public “ Now, divide the above calculated unmarked applications in the ratio of Gross Liability. Note Under this approach securities under firm underwriting is not treated as unmarked applicat securities under firm underwriting is credited to individual underwriters separately . ipications and Step 4 Deduct securities under ‘Firm Underwriting’ of individual underwriters from the figure obtained in step 3. The resultant figure may be Negative or Positive. In case of negative figures proceed to Step 5. Positive or Zero figures represents net liability as per agreement. In this case, g0 to step 6, i. skip step 5) Step 5 Find total of all the negative figures and divide it among the underwriters having positive figure in the ratio of their gross liability. This process is repeated until all the figures become non-negative. Non-negative figures arrived at this stage represent the net liability of underwriters as per underwriting agreement. After completion of this step move to step 6. Step 6 Now, add the securities undertaken as firm underwriting with the net liability to find total liability. Thus, net liability consists of net liability as per underwriting agreement and the number of securities under firm underwriting. Illustration 7: [Benefit of Firm Underwriting is Given to the Individual Underwriters] Gajanan Ltd. issued 25,00,000 equity shares of © ; tothe promoters and the balance offered to the public was underwritten by three underwriters P, Qand R in the ratio of 2:3:4 with firm underwriting of 50,000, 60,000 and 70,000 shares each respectively. Total subscription received for 13,88,000 shares including marked applications and excluding firm underwriting. Marked applications were as follows: P3,00,000; Q 3,50,000; and R 4,50,000 Unmarked and surph licatic iabiti plus applications liability of each underwriter assuming individual underwriters. 10 each at par. 7,00,000 shares were issued ility ratio. Ascertain the istributed in gross liabi to ee ont of tr riting is given to the that the benefit of firm underw Solution ; Statement Showing Liability of Underwriters - (Fig. a of sie) Gos Gaby BRYN) ama 6,00,000 anne CeO) !Marked Application (WN2) Bn a 000] 700,000 Less Unmarked Application (WN3) 0 $Bio00 N00 oan Scanned with CamScanner412 Corporate Accounting Lene eal om faa og 3s : Firm Underwriting : “ Netlibity ofasperunderwstingagreement | SWE] Eo] Nsom | St Less : Surplus of P to be allocated to Q & Rin3:4 Deon aan aa Net Liability as per underwriting agreement soao| _0000| 70000|_¥2 Tol ably dense 50,000 1,48,000 | 2.14.00 sini, ‘abil Working Not ; - 100 - 7,00,000 ‘ai Less Shares issued to promoters = 25,00,0( 00, Total Shares = 18,00,000 (2) Total Marked Applications = (P) 3,00,000 + (Q) 3,50,000 + (R) 4,50,000 = 11,00,000 (@) Calculation of unmarked application : 1388000, Total application received Wy Less : Total marked applications received 17,00,000 9X, ‘Unmarked application by the Public 2,88,000 Note : Total unmarked application will be allocated in the ratio of gross i (4) [Werification) Total allocation of shares = Shares applied by public (Unmarked + marked) + Liability of underwriters = 2,88,000 + 11,00,000 + 4,12,000 = 18,00,000 Illustration 8 : [Firm Underwriting] Lovely Lid. issued 20,000 shares which are underwritten as follows — Ram ~ 12,000 shares, Lakhan — 5,000 shares and Bharat ~3,000 shares The underwriters made applications for firm underwriting as under — Ram ~ 1,600 shares, Lakhan ~ 600 shares and Bharat — 2,000 i Resa , shares fort 0000 ception excluding firm underwriting but including marked application 00) eamatked application were: Ram — 2,000 shares, Lakhan ~ 4,000 shaves and Bhat You are required to show the allocation of liability of the underwriters, Solution : (1). Gross Lial Statement showing Liabili of Underwriters (Fig. No. of St Lakhan | Bharat 5,000 3,000 20 (4,000) |_1,000)|_@ 1,000 2,000] 15 (750)|__(450)|_& 250[~1,550[ 10! Gross Liability (12:5:3) Less : Marked applications (Given) Less : Unmarked Application (WN 1 & 2) Less : Firm Underwriting Net Balance Less : Adjustment of Surplus w.r.t, Lakhan & Bharat 3sop (450; Net Liability as per underwriting agreement 5,800 5 Scanned with CamScannerrr Underwriting of Shares and Debentures 4.13 ‘Add : Firm Underwriting 1,600 600 Foal Liability of Underwriters 7,400 600 th oo Working Note + ‘The problem is solved by taking the assumption that the benefit of Firm Underwriting is given () fo the individual underwriters. (2) Unmarked application = Total application received Less Marked application = 10,000 - (2,000 + 4,000 + 1,000) = 3,000 shares (@ Unmarked applications are distributed in the ratio of gross liability. Illustration 9: [Partial Underwriting and No Information about M: Information Given] iach X Ltd. issued 20,000 shares of % 100 each at a premium of f 15 each. 90% of the issue was written by M/s Mohan Lal and Co. at a commission of 1% on the nominal face value. unde A Applications were received for 16,000 shares and allotment was fully made. All the moneys 47 rom allottees were received in one instalment. The accounts with M/s Mohan Lal and Co. \vere settled. Show the journal entries to record the transaction. Solution : Journal Entries in the Books of X Ltd. isne TT Particulars TFL bee 1 [Bank A/c Dr. 18,40,000 ‘To Share Application and Allotment A/c 18,40,000 (Being share application money received for 16,000 @€ 115) 2 | Share Application and Allotmant A/c Dr. 18,40,000 To Share Capital A/c (16,000 x @ 100) 16,00,000 To Securities Premium A/c (16,000 « 15) 2,40,000 (Being shares allotment and application money t to share capital Alc) 3. [Mohan Lal and Co. Ae Dr. 4,14,000 To Share Capital A/c (3,600 x 100) 3,60,000 To Securities Premium A/c (3,600 « %15) 54,000 (Being amount due from the underwriters as per underwriting agreement) 4 [Underwriting Commission A/c Dr. 18,000 To Mohan Lal and Co. A/c 18,000 (Being underwriting commission payable @ 1% on 18,000 shares as per it) 5 [Bank A/c Dr. 3,96,000 To Mohan Lal and Co. A/c 3,96,000 (Being balance amount received from Mohan Lal and Co. after adjustment ——Lefunderwriting commission) : Working Note: Calculation of Underwriters Liability : (No. of Sea) —— Particulars iz Mia Mohantal@Co.[ X Ltd.’ ‘Total Liability (9:1) 18,000 2,000 jie Applications received divided in the ratio of 9:1 14,400 1,600 AetLiability — ~ 3,600 400 Scanned with CamScannerau Corporate Accounting | Note: | : (i) 20% of the total issue will be assumed to be underwritten Dy sniany itself. Gi) No details about marked and unmarked application is given in the problem, es, applications received are divided in the ratio of 9:1. Illustration 10 [Unmarked Applications Not to be Shared in the Ratio of G, Liability ] —_ X Ltd. a public limited company, with a capital of 81,00,000 divided into e uit 100 each, places its entire issue in the market, and the whole issue has been tide follows: A 3,000 shares B 3,500 shares C_ 1,000 shares D_ 1,500 shares E 200shares F 800 shares All marked forms are to go in relief of the liability of the underwriter whose name th] bear. The applications received on the forms marked by the underwriters are as follows. A 2,500 shares B 2,350 shares C 650 shares D 100shares E 200shares F 700 shares Applications for 2,000 equity shares are received as unmarked application forms, ala the liability of the individual underwriters. In terms of the underwriti i iting agreemen, relevant proportion is to be ascertained not in terms of the original liability ratios but after ge credit for marked forms, Solution : Calculation of Net Liability of Underwriters (Big. No. of Sha __Particulars A@! BOT CO_DOLE@] FeO] tull 03s Liability 3,000 | 3,500 1,000 Less : Marked Forms (2,500) | (2,350)|_ (650) 500] 1,150] 350 we fevamateed Forms (WN1&2)|__286|_“¢57| 299 le 214 Working Note : 431 180 Mlustration 11 : [Calculation of Liabili Albert Ltd. issued 50,00,000 e ‘ ty of Underwriters] by A, Band Cas below : ‘wily shares of 710 each. The whole issue was under! A. 15,00,000 shares B_ 25,00,000 shares C 10,00,000 shares Scanned with CamScannerA. 12,00,000 shares B_ 25,00,000 shares C_ 850,000 shares Calculate the number of shares to be taken up by the und: lerwriters, Solution : ” Statement Showing Liability of Underwriters = culars (Fig. No. of Shares) Gros Liability - TEDoge Soe eae Toul Less : Marked applications (12,00,000) | (25,00,000) | (8,50, 00) ee 3,00,000 Nil] 1,50,000 4,50,000 (90,000) |_(1,50,000)| (60, 000) | _(3,00,000) 2,10,000| 150,000 90,000] — 1,50,000 Less : Unmarked Application (3: Less : Surplus of B to be divided between A. and B in (3:2) (90,000) | _1,50,000| (60,000) = Net Liability of Underwriters 1,20,000. Nil] 30,000] 750,000 Working Note : {) Unmarked application = Total application received Less Marked application = 48,50,000 — 45,50,000 = 3,00,000 shares (i) Unmarked applications will be allocated to A, B and C in the ratio of their ‘gtoss liability. Mlustration 12 : [Benefit of Firm Underwritingisgiven/not given to the Individual Underwriters] it leon ‘company made public issue of 1,25,000 equity shares of 100 each at par, & 50 payable ‘pplication. The entre issue was underwritten by four parties A,B, Cand Din the proportion 030%, 25%, 25% and 20% respectively. Under the terms agreed upon, a commission o ™as payable on the amounts underwritten. A.B Cand D had also agreed on ‘frm’ underwriting of 000, 600 Niland 15000 shares ively. The total subscription, excluding firm underwriting bu heres “Pplications were for 90,000 shares. Marked applications received were as 424,000; B 20,000; € 12,000; and D 24,000. the journal ents that i ivi it Iso show t liability of the individual underwriter and al A ne eeiien make inte oats of company. If the benefit of firm underwriting is no! vidual underwriters. . «ae ahe benefit of frm Case 2: Ascertain the liability of the individual underwriters, if oe Bt oad viting is given to the individual underwriters. a : individual underwriters] Cail [Benefit of derwriting is not given to the individual un jenefit of firm underwrit ‘Woul ‘othe indi Scanned with CamScannerCorporate Accounting 4.16 i Fi Statement Showing Liability of Underwriters _—_ - = ig. Xe OF Sh z Gross Liabili —— 37500| 31,250] 31,250] 25,000 Less : Marked Applications 24,000) | (20,000) | (12,000) | (24,000 ° Pee 73,500] 11,250 19,250] 1,000 cat 8,750) | (8,750) |_ (7,000) Less : Unmarked Application (Refer note 2) 8 oon tt Ca smal a on : ted to A and B Less : Surplus of D to be alloca! 2.250)|_(1,875)|_@,875)|_ (6,000) and Cin (6:5:5) Net Liability as per Underwriting agrements TO iG oa Nal 45 i ‘Add : Firm Underwriting _ 4 se ee2st 12000 Total Liability 4 é Note: (i) Ratio of Gross Liability = 30:25:25:20 or 65:54 (i Calculation of Unmarked application : Total application received 90,000 Less : Total marked applications received (80,000) ,000 ‘Add : Application under firm underwriting 25,000 Total unmarked applications 35,000 Calculation of amount due from (or due to) underwriters Daa Particulars x B c ‘No. of shares subscribed (as per the above statement) 4750| 6,625 | 8,625 “Amount Payable @@ 50 %2,37,500 | % 3,31,250 | % 431,250 Less: Amount paid as Firm @ & 50 % 2,00,000 | &3,00,000 = Balance Payable (Refer Journal Entry no. 2) 37,500] © 31,250 %4,31,250 Underwriting commission @ 2% on nominal value of shares underwritten by A, B, C&D. 75,000| _62500| _ 62,500 ‘Amount Received/(Paid) (37,500) | €(31,250) | €3,68,750 Journal Entries = Particulars Dn ® 1 | Bae alc Dr.{ | 57,50,000 To Share Application A/c 3 (Being share application money received) Note : From public 90,000 @ & 50 + Firm application 25,000 @ 50 2 [AAI Dr 37,500 BA/c Dr. 31,250 Cle Dr. 4,31,250 Share Application A/c De! | 750,000 To Share Capital A/c 5 6 (Being shares allotted and application money tre i taco) Note:The above alomentinadestey ese wae 15,000 shares allotted to A,B, C, and D respectively under the agreement. ‘Scannec -d with CamScannerUnderwriting of Shares and Debentures 417 3. [Underwriting Commission AZe 3,68,750 ToA A/c ee ToBA/c 4 3,68,750 3,68,750 5 37,500 31,250 50,000 118,750 (Being balance amount paid to A, B and D after adjustment) Note : Other subsequent entries for allotment and call will be passed in the usual manner. Amount payable to A, Band D may be adjusted with subsequent calls. Case B [Benefit of firm underwriting is given to the individual underwriters] Statement Showing Liability of Underwriters (Fig. No. of Shares) Particulars a B CL =D] Total Gross Liability 37,500| 31,250] 31,250] 25,000] 1,25,000 Less : Marked Applications (24,000) | (20,000) | (12,000) | (24,000) |_ (80,000) 13,500 11,250] 19,250 1,000] 45,000 Less: Unmarked applications (3,000)| _(2,500)| (2,500) |_(2,000) | (10,000) 10,500 8,750] 16,750[~ 1,000] 35,000 Tess Firm Underwriting (4,000) | (6,000) Nil | (15,000) | (25,000) 6500| 2,750] 16,750] 16,000] 10,000 Less: Surlus of D to be allocated to A, Band Cin 6:5 |_(6,000)| (5,000) | _(5,000) | (16,000) 500 (2,250) | 11,750 =| 10,000 Less : Surplus of B to be allocated to A and Cin 6:5 (4,227) |_2,250|_ (1,023) = = (727) =| 10727 =} 10,000 ss: Surplus of A to be allocated to C 27 -| @n = 7 anne &s perunderwiting agreement = =| 10,000 =| 10,000 Firm Underwriting 4,000| 6,000] __nil|_15,000| 25,000 Total Liability 4,000] 6,000] 10,000] 15,000 | 35,000 Note: 4 Ratio of Gross Liability = 30:25:25:20 or 6:5:5:4 i) Unmarked Application = Total application received Less Total marked applications received Ca = 90,000 — 80,000 = 10,000 shares aetion of amount due from (or due to) underwriters Noora Particulars A B c D “Amgettates subscribed (a per the above slatemend). 000 6,000] 10,000 [15,000 a Payable @ @ 50 *% 2,00,000 | % 3,00,000 | € 5,00,000 | %7,50,000 Balance penn! Paid as Firm @ & 50 £2,00,000 | = 3,00,000 | 7,50,000 'yable (Refer Journal Entry no. 2) Nil Nil | % 5,00,000 Nil Scanned with CamScannerads Corporate Accounting ‘Underwriting Commission @ 2% on nominal value of shares underwritten by A, B, C&D 75,000 Sa visa 504 “Amount Received / (Paid) 75.000) €(62:500) 3g Journal Entries SLNo. Particulars TEISSDER IS cr, 1 [Bank Ale Dey ps7s0000) —e "To Share Application A/c 57,50 (Being share application money received) | Note : From public 90,000 @ & 50 + Firm application. 25,000 @ 50. | 2 [Care Dr. 50,000 Share Application A/c Dr.) — | 57,50,000 "To Share Capital A/c 62,500 (Being shares allotted and application money transferred to share capital . account) Note : The above allotment includes 4,000; 6,000; 10,000; and a paises aie t0A, B, Cand D respectively under the agreement. dering Commission Alc Dr. 2,50,000 ToBAlc 75a ToCAlc 62,50 To DAs 62,500 | Reteesentng commision pte © 2% es per agreemend) saat pica Dr. 437,500 (Being balance, 5k : “sh onm ‘ amount received from C after adjustment of underwriting 437,510 2 ares | B. ae Dr. 75,000 ToBank A/c Dr: 62,500 | Being balance amount paid to A, B and. is 50,000 we Mlustration 13; [Underwriters ue On Ist Srwriters Liability an it equity Mae hon Jain Ltd. comes bievine Forfeiture of Share] Bist January) and &3 on alloree rn Of 5%. 8 pppublic issue of share capital of 1090 Theissue is underwriting nt ot Match) including peenice sPPueation (on oF be of the issue pri y Wo underwri '8 Premium. Price. Each of the underwri Titers A and B Ps Subscription where received for ee eS 20.000. ally, the commission bo#" () Marked with A’s seal 60,000 Shares, the distribu ee 5,20,000 shar > the distributi follo" (ii), Marked with B’ res, ion of forms being as! s Seal 3,60,000 shares ang o Unmarked forms 80,000 shares, ¢ of the allottees (using forms due on allotment all other money due beisg 3222) F009 4 ome 0 ed inn 7000 shares fails to pay the ams ig upon the underwriters. The commission ain ail including any cae ton thesh™™ The shares of indifferent allottee are finally fortitedby apy separately. nel june and re-allotted for P*Y Scanned with CamScannerUnderwriting of Shares and Debentures 419 for & 4 Per share. You are required to pass journal entries to record the events and in actions (including Cash) assuming that the total marked forms include firm underwritten Case B: Will it make a difference if marked forms exclude firm underwriting. : Solution: StatementShowing Liability of Underwriters (Fig. No. of Shares) = pparticnlars A B Total Gross Liability (Qa) 5,00,000] —5,00,000| 10,00,000 Less : Marked applications (Note) (6,00,000) | _(3,40,000) |_(8,40,000) _ Nil] 1,60,000] 1,60,000 Less: Unmarked Application (40,000) } (40,000)] (80,000) (20,000) | __(20,000) | _ (40,000) Less: Firm Underwriting (60,000) 1,00,000/ 40,000 Net Balance Less: Adjustment in B’s Surplus 60,000| (60,000) = Liability excluding firm underwriting =| 40,000/ 40,000 ‘Add : Firm Underwriting 20,000| 20,000] 40,000 Total Liability of Underwriters 20,000 60,000 80,000. Note: {Q) ‘The problem specifies that the total marked application include Firm underwriting, thus, A's final liability will be nil and B's final liability is w.r.t. 40,000 shares. (2) Calculation of marked application (Excluding firm underwriting) : ‘A’s~5,20,000 Less 20,000 = 5,00,000 shares B's ~3,60,000 Less 20,000 = 3,40,000 shares Journal Entries in the Books of Jain Ltd. Particulars Tey De®] ce @) Jan.31 | Bank A/c (9,60,000 @ € 2.50) Dr.| | 24,0000 i aD Share Application A/c papas ing share application money received) Mac.31 [Share Application A/c Dr. 24,00,000 | «00,000 To Share Capital A/c " (Being shares alloted ancl application money transferred to share enpial Mar, 31 account) 28,80, 000 Share Allotment A/c (9,60,000 @% 3) Dr. ee | 94,00,000 To Share Capital A/c (9,60,000 @ & 2.50) 4,80,000 To Securities Premium A/c (9,60,000 @ & 0.50) Ma. 31 Peng share allotment money dite) 2,20,000 Bs A/c (40,000 @@ 5.50) , 200,000 To Share Capital A/c (40,000 @ & 5.00) 20,000 To Securities Premium A/c (40,000 @ & 0.50) Ma 3 [Beit share application and allotment money due from B) Dz} | 30.94,000 Bank A/c [(9,60,000 — 2,000)@ & 3 + © 2,20,000] 28,74,000 To Share Allotment A/c zag ToBA/c (Being shares allotment mor received) Scanned with CamScanner4.20 ‘Mar. 31 Jun. 30 Jun. 30 Jun. 30 Corporate Accounting ‘Underwriting Commission A/c Dr. To Bank A/c (Being underwriting commission paid or 10,00,000 shares of A and B® 5% of issue price, ie. @ 10.50 as per agreement) Share Capital A/c (2,000 @ 5) Dr. Securities Premium A/c (2,000 @ € 0.50) Dr. To Equity Share Allotment A/c (2,000 3) To Share Forfeiture A/c (Bal. fig.) (Being 2,000 shares forfeited for non-payment of allotment amount) Bank A/c (2,000 @ & 4) Dr. Share Forfeiture A/c (2,000 @ 1) Dr. To Share Capital A/c (2,000 x5) (Being forfeited shares re-issued @ % 4 per share) Share Forfeiture A/c Dr To Capital Reserve A/c 5,25,000 10,000 1,000 8,000 2,000 4,000 5,25,000 * 6,000 5,000 10,000 4,000 (Being profit on re-issue transferred to capital reserve account) Case B : The issue willbe fully subscribed in case marked forms exclude firm underwriting i.e. 9,60,000 + 20,000 (A) + 20,000 (B) = 10,00,000 shares. aeeeneenet saneeeeens Scanned with CamScanner