Underwritting

1. Underwriting of shares and
debentures
Presented by:
Harshit Garg
Assistant Professor
IBM (UG)
BCCC 0011 Company Accounts And
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2. Learning Objectives
• What is Underwriting of Shares and Debentures
• Meaning of Underwriting Commission
• Types of Underwriting
• Provision of companies act effecting underwriting commission
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3. What is Underwriting of
Shares and Debentures
• Underwriting is an agreement where by the underwriters
ensure the company that in case the shares and debentures
offered to the public, are not subscribed by the public to the
extent, the balance of shares and debentures will be taken up
by the underwriters.
• For this service, they get underwriting commission.
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4. Meaning of Underwriting
Commission
• Underwriting commission is payment which is given by
company to underwriters for their services of underwriting.
• Actually, contract of underwriting is same as the contract of
insurance.
• Company gives maximum 5% commission to underwriter for
selling his shares.
• Company gives maximum 2.5% commission to underwriter
for selling his Debentures.Underwriter will take the risk of
takeover the shares which will not be subscribed by public.
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5. Qu
• Underwriting is a contract between ………………., &…………..
• What is the % of Underwriting Commission
– On Share -
– On Debentures –
• The functions of underwriters is to ……………………………of floated shares
• If the company was not able to collect the …………….% amount ,then it
needs to compulsory return the money to those who have subscribed
the shares
• Payment to underwriting commission is authorized under
………………..Association.
• As per latest SEBI Guidelines ,underwriting is not mandatory- T/F
• As per SEBI Guidelines , any share broker act as underwriter - T/F
• A merchant banker wants to act as a underwriter so the certificate
provided by …………………….
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6. Some Underwriting
agency in india
• Industrial development bank of india
• CIL Securities ltd
• Aarnik securities private Ltd
• Arihant corporate service Ltd.
• BNR Service private Ltd.
• Computech international private ltd.
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7. Sample of underwriting
Agreement
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8. Sub Underwriting:
• An underwriter may himself enter into a sub-agreement with
other persons, called sub- underwriters, whereby he transfers a
part of his underwriting risk.
• Just like re-insurance, sub- underwriting helps in spreading
the risk.
• An underwriter may appoint several underwriters to work
under him.
• However, the sub-underwriters have no privacy of contract
with the company. They get their commission from the
underwriter and are also responsible to him.
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9. Underwriters
• To avoid the risk of under-subscription companies may seek
the help of a specialised group of risk-redeemers called
Underwriters.
• The function of the Underwriters is to arrange subscription of
floated shares.
• The firms or persons who are engaged in underwriting are
called underwriters.
• The commission payable to underwriters for underwriting is
known as underwriting commission.
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10. Advantages of Underwriting
• Advantages of Underwriting
• 1. The company is sure of getting the value of shares issued
• 2. It enhances goodwill of the company
• 3. It facilitates wide distribution of securities
• 4. The company gets expert advice from underwriters in the
matter of marketing securities
• 5. It fulfills requirement of minimum subscription
•
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11. Provisions regarding
Underwriting
• 1. A company cannot pay any commission on the issue of shares
unless permitted by its Articles.
• 2. Commission cannot be paid to any person for shares or
debentures which are not offered to the public for subscription.
• 3. The commission is limited to 5% of issue price in case of shares
and 2 ½ % in case of debentures. However, in practice, SEBI has
allowed underwriting commission only at the rate of 2.5% of issue
price of equity shares.
• 4. The amount or rate of commission should be disclosed in the
prospectus.
• 5. The directors must state in the prospectus that the underwriters
are capable of meeting their obligations under the underwriting
contract.
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12. Underwriting Agreement
Underwriting Agreement
Conditional
Underwriting
Underwriter agreed to take
up ,agreed proportion of
shares if, not taken by the
public
Firm
Underwriting
Underwriter agree to make
up agreed proportion of
shares irrespective of the
Public response to the issue
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13. Marked or Unmarked
Application
Generally shares or debentures of a company are underwritten by
two or more underwriters in an agreed ratio.
Usually the forms are stamped with the name of the underwriters
in order to distinguish the forms of one underwriter from that of
others. Such stamped applications when received are
called marked applications.
The application forms which are received by the company
without any name of the underwriter are called unmarked
applications
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14. 1 Word
1. In ………………underwriting the underwriters are
agreed to taken the share only when the shares
are not subscribed by public
2. In ……………….. Underwriting the Underwriter
agree to make up agreed proportion of shares
irrespective of the Public response to the issue
3. Marked application are those applications which
are bear the ……………….. Of underwriters
4. Overriding commission is paid by the principal
underwriter to sub underwriter - T/F
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15. Determination of Liability in
respect of Underwriting Contract
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Underwritten
Fully Underwritten
Without Firm
underwriting
With Firm
underwriting
Partial
Underwritten
Without Firm
underwriting
With Firm
underwriting

16. Journal Entries in the
books of the Company
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1. For commission due:
Underwriting Commission A/c Dr
To Underwriters
2. In case the whole of shares or debentures are not taken up by the public,
the remaining is allotted to underwriters. The entry is:
Underwriters A/c Dr
To Share Capital A/c
To Debentures A/c
(Balance of shares and debentures allotted to underwriters)
3. For payment of commission:
Underwriter A/c Dr
To Bank (cheque)
To Share Capital A/c (shares)
To Debentures A/c (debentures)
4. For the balance amount due from underwriters received:
Bank A/c Dr
To Underwriters A/c

17. Underwriting A/c
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This account is prepared by the underwriter to
ascertain the profit or loss on underwriting.
It is a nominal account and is prepared like a
P/L A/c

18. • When whole issue is underwritten by by the
underwriter is called …………….
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19. a) When issue is fully underwritten
(without Firm Underwriting)
When the entire issue has been underwritten by
one underwriter, the liability of the underwriter is
calculated as follows:
Liability = No. of shares underwritten – Total
no. of application
If the entire issue has been underwritten by two
or more underwriters, all unmarked
applications are divided between them in the
ratio of gross liability of individual underwriter.
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20. Format Of Underwriting Statement
Liability of each underwriter is calculated as follows:
Gross liability according to the agreed ratio ………..
Less: Marked applications ………..
Balance left ………..
Less: Unmarked application in the ratio of gross liability ………..
Net liability ………...
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21. BCCC 0011 Company Accounts And
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22. When the issue is fully underwritten
(with Firm Underwriting)
.
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Liability of each underwriter is calculated as follows:
Gross liability according to the agreed ratio ………..
Less:Marked Application (excluding firm underwriting) ………..
Balance left ………..
Less: *Unmarked application in the ratio of gross liability …
Net ability ………
Add. Firm_underwriting …….......
Total Liability …………
• No. of Unmarked application
= Total subscription excluding firm underwriting – Marked application excluding firm
underwriting + Application under firm underwriting.

23. c) When the issue is partially
underwritten
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Liability = Gross Liability – Marked application
+ Firm underwriting (if there is firm underwriting)
Note: If no information is given regarding marked and
unmarked application, marked application is calculated as follows:
Marked applications = Total No. of application received x % of
underwriting

24. Marked or Unmarked
Application
Generally shares or debentures of a company are underwritten by
two or more underwriters in an agreed ratio.
Usually the forms are stamped with the name of the underwriters
in order to distinguish the forms of one underwriter from that of
others. Such stamped applications when received are
called marked applications.
The application forms which are received by the company
without any name of the underwriter are called unmarked
applications
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25. Q-1
1. Rahul Ltd issued 10,000 shares .Company
appointed underwriters X for 6000 share and Y
appoint for 4000 shares so this is a case of.
A. Fully Underwritten -Without Firm underwriting
B. Fully Underwritten -With Firm underwriting
C. Partial Underwritten - Without Firm
underwriting
D. Partial Underwritten - With Firm underwriting
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26. • 2. Rahul Ltd issued 10,000 shares .Company
appointed underwriters X for 45% share and Y
appoint for 35% shares and remaining were
issued by company itself ,so this is a case of.
A. Fully Underwritten -Without Firm underwriting
B. Fully Underwritten -With Firm underwriting
C. Partial Underwritten - Without Firm
underwriting
D. Partial Underwritten - With Firm underwriting
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27. • 3. Rahul Ltd issued 10,000 shares .Company
appointed underwriters X for 6000 share and
Y appoint for 4000 shares. Company received
marked application of X-4000, Y- 6000, so Net
Liability of Y should be.
1. 0
2. 2000
3. 4000
4. 6000
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28. 4. Rahul Ltd issued 10,000 shares .Company
appointed underwriters X for 6000 share and Y
appoint for 4000 shares . Company received
applications in full .out of Company received
marked application of X-3000, Y- 2500, so total
unmarked applications are
A. 5500
B. 4500
C. 3000
D. 2500
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29. 5. Rahul Ltd issued 10,000 shares .Company
appointed underwriters X for 6000 share and Y
appoint for 4000 shares . Company received
applications of 5500 .in which Company received
marked application of X-3000, Y- 2500, so Net
Liability of X is
A. 3000
B. 1500
C. 3500
D. 0
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30. 6. Rahul Ltd issued 10,000 shares .Company
appointed underwriters X for 6000 share and Y
appoint for 4000 shares . Company received
applications of 5500 .in which Company received
marked application of X-3000, Y- 2500, so Net
Liability of Y is
A. 3000
B. 1500
C. 3500
D. 0
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31. Q. -1
• A ltd issued 100000 equity shares .The whole issue was
underwritten as :- X 40%, Y-30%,Z-30%
• Application for 80,000 shares were received in all , out of
which applications for 20000 shares had stamped of X ,those
for 10000 shares had that of Y , and 20000 shares had that of Z
, the remaining applications for 30000 shares did not bear any
stamp .Show the liability of underwriters?
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32. ANS -1
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STATEMENT SHOWING LIABILITY OF UNDERWRITER
UNDERWRITER X Y Z
Gross Liability (40%,30%,30%) 40000 30000 30000
Less - Marked applications 20000 10000 20000
20000 20000 10000
Less - Unmarked applications
(30000 shares in 4:3:3) 12000 9000 9000
NET LIABILTY 8000 11000 1000

33. Q-2 (SELF)
Mohan ltd issued 2,00,000 equity shares .The whole
issue was underwritten as :- A 50%, B-50%
Application for 1,75,000 shares were received in all ,
out of which applications for 60,000 shares had stamped
of A ,those for 50,000 shares had that of B , the
remaining applications did not bear any stamp .Show
the liability of underwriters?
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34. ANS -2
• <Bullet Points should not be more than 5>
• Point-2
• Point-3
• Point-4
• Point-5
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STATEMENT SHOWING LIABILITY OF UNDERWRITER
UNDERWRITER A B
Gross Liability (50%,50%) 100000 100000
Less - Marked applications 60000 50000
40000 50000
Less - Unmarked applications
(65000 shares in 5:5) 32500 32500
NET LIABILTY 7500 17500

35. Qu -3(SELF)
• Newton Ltd. Incorporated on 1 January 2005 , issued a
prospectus inviting applications for 20000 equity shares of Rs.
10 each. The whole issue was fully underwritten by A,B,C as
follows:
• A-10000 shares , B- 6000 shares , C -4000 shares
• Applications were received for 16000 shares of which marks
application as follows :
• A- 8000 Shares , B – 2850 shares and C- 4150 shares
• You are required to find out liability of individual underwriter.
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STATEMENT SHOWING LIABILITY OF UNDERWRITER
UNDERWRITER A B C
Gross Liability 10000 6000 4000
Less - Marked applications 8000 2850 4150
2000 3150 -150
Less - Unmarked applications
(16000-8000-2850-4150) 500 300 200
Resultant Liabilty 1500 2850 -350
Less -surplus of C alloted to A,B 219 131 350
( RATIO 5:3)
Net Liability 1281 2719NIL

37. Qu -4
• Modi Ltd. Incorporated on 1 May 2020 , issued a prospectus
inviting applications for 60000 equity shares of Rs. 20 each.
The whole issue was fully underwritten by X,Y,Z as follows:
• X-25000 shares , B- 20000 shares C – 15000 Share
• Applications were received for 50000 shares of which marks
application as follows :
• X- 25000 Shares , Y – 10000 shares and Z- 10000 shares
• You are required to find out liability of individual underwriter.
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38. ANS -4
STATEMENT SHOWING LIABILITY OF UNDERWRITER
UNDERWRITER X Y Z
Gross Liability 25000 20000 15000
Less - Marked applications 25000 10000 10000
0 10000 5000
Less - Unmarked applications
(45000-30000-10000-10000) 2083 1667 1250
Resultant Liabilty -2083 8333 3750
Less -surplus of C alloted to X,Y 2083 1190 893
( RATIO 4:3)
Net Liability NIL 7143 2857
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39. With firm underwriting –Q.5
• J ltd has issued 20,000 shares which were underwritten as
follows :
• A-12,000 Share, B-5000 Shares, C-3000 Shares
• The Underwriters made applications for firms
underwriting as :
• A-1600 Shares , B -600 Shares, C- 2000 Shares
• The total subscription excluding firm underwriting but
including marked applications were for 10000 shares
• The Marked applications as under :
• A-2000 Shares , B -4000 Shares , C-1000 Shares
• You are required to show the allocation of liability of the
underwriters.
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40. ANS -5
STATEMENT SHOWING LIABILITY OF UNDERWRITER
UNDERWRITER A B C TOTAL
Gross Liability 12000 5000 3000 20000
Less - Marked applications 2000 4000 1000 7000
10000 1000 2000 13000
Less - Unmarked applications 4320 1800 1080 7200
10000-7000+4200) 0
Resultant Liabilty 5680 -800 920 5800
Less -surplus of C alloted to X,Y 640 800 160 1600
( RATIO 12:3) 0
Net Liability as per Agreement 5040 0 760 5800
Add :- Firm Underwriting 1600 600 2000 4200
Total Liability 6640 600 2760 10000
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41. Q.6 (Self)
• ABC ltd has issued 80,000 shares which were underwritten
as follows :
• M-30,000 Share, N-30000 Shares, O-20000 Shares
• The Underwriters made applications for firms underwriting
as :
• M-10000 Shares , N -5000 Shares, O- 1000 Shares
• The total subscription excluding firm underwriting but
including marked applications were for 60000 shares
• The Marked applications as under :
• M-25000 Shares , N -5000 Shares , O-15000 Shares
• You are required to show the allocation of liability of the
underwriters.
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42. ANS -6
STATEMENT SHOWING LIABILITY OF UNDERWRITER
UNDERWRITER M N O TOTAL
Gross Liability 30000 30000 20000 80000
Less - Marked applications 25000 5000 15000 45000
5000 25000 5000 35000
Less - Unmarked applications 11625 11625 7750 31000
(60000-45000+16000) 0
Resultant Liabilty -6625 13375 -2750 4000
Less -surplus of C alloted to X,Y -6625 9375 -2750 0
( RATIO 3:2) 0
Net Liability as per Agreement 0 4000 0 4000
Add :- Firm Underwriting 10000 5000 1000 16000
Total Liability 10000 9000 1000 20000
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