Practical Illus and practice sums of the underwriting of shares

1. UNIT 4
UNDERWRITING OF
SHARES
Dr. Yagna Vyas
B.V. Patel Institute of Management, Uka Tarsadia
University

2. Learning Outcome
After studying this unit,
 you are able to know the duties and liabilities of an underwriter.
 You are able to know how to compute liabilities of an underwriter.
 You are able to know Marked and unmarked applications and firm
underwriting of shares.

3. Introduction:
 Underwriting contracts are basically of two types:
Wholly Underwritten and Partial Underwritten
 Two types of underwriting Contracts:
Normal Underwriting and Firm Underwriting
 Underwriters Commission:
 According to Companies Act, 2013, commission rate which is recorded in
the Articles of Association, not exceeding 2.5% of the issue of debentures
and 5% of the issue of shares can be paid.
 No commission can be paid to the shares and debentures which have not
offered to the general public for subscription.

4. Practice Illus 1:
Gemini ltd. go for public issue of 30,00,000 equity shares of Rs. 10
each at Rs. 15 per share. A, B & C took underwriting of the issue in
3:2:1 ratio. Applications were received for 27,00,000 shares. The
marked applications were as follows:
A 8,00,000 shares
B 7,00,000 shares
C 6,00,000 shares
Calculate the net liability of underwriters.

5. Illus 2:
Gemini ltd. go for public issue of 50,00,000 equity shares of Rs. 10 each.
A, B & C took underwriting of the issue in 15,00,000; 25,00,000 and
10,00,000 shares. Applications were received for 48,50,000 shares. The
marked applications were as follows:
A 12,00,000 shares
B 25,00,000 shares
C 8,50,000 shares =45,50,000
Unmarked application: 3,00,000
Calculate the net liability of underwriters

6. Solution
Particulars A B C
Gross liability 15,00,000 25,00,000 10,00,000
Less: marked application 12,00,000 25,00,000 8,50,000
Less: unmarked application (3:5:2) 90,000 1,50,000 60,000
Balance 2,10,000 (1,50,000) 90,000
Less: negative balance (3:2) 90,000 (1,50,000) 60,000
Underwriters Net liability 1,20,000 Nil 30,000

7. Illus 3
Gemini ltd. go for public issue of 20,000 equity shares of Rs.
10 each. A, B & C took underwriting of the issue in 10,000;
6,000 and 4,000 shares. Applications were received for 16,000
shares. The marked applications were as follows:
A 8,000 shares
B 2,850 shares
C 4,150 shares= (15,000 shares)
Unmarked application( 16000- 15000)= 1000
Calculate the net liability of underwriters

8. Solution 3
Particulars A B C
Gross Liability (10:6:4)=(5:3:2) 10,000 6,000 4,000
Less: Marked application 8,000 2,850 4,150
Less: unmarked application(1000) 500 300 200
Balance 1,500 2,850 (350)
Less: Negative balance management(5:3) 219 131 (350)
Underwriters Net Liability 1,281 2,719 Nil

9. Additional adjustments
 Assume that the marked application were as follows:
 A: 8000
 B: 6850
 C: 4500 = 19350
 Unmarked application 1000 = total application received is 20,350

10. Solution
Particulars A B C
Gross Liability 10,000 6,000 4,000
Less: marked application 8,000 6,850 4,500
Less: unmarked application (10:6:4) 500 300 200
Balance 1,500 (1,150) (700)
Less: negative balance 1,850 (1,150) (700)
Net Liability of Underwriters (350) Nil Nil

11. Illus 4:
XYZ ltd issue 25,00,000 shares @Rs. 10each , 7,00,000
shares issued to promoter, balance given to public. P,Q, &
R underwriter in the ratio of 2:3:4. Firm Underwriting
50,000,60,000 & 70,000 respectively.
Total Subscription is 13,88,000 excluded firm
underwriting and including marked applications. Marked
Application of P,Q,R is 3,00,000; 3,50,000 & 4,50,000
respectively. Unmarked and surplus application is to be
distributed in Gross liability ratio. Ascertain the liability
of each underwriter

12. Working notes:
 25,00,000 – 7,00,000= 18,00,000
 Gross Liability Ratio is 2:3:4
 18,00,000*2/9= 4,00,000= P
 18,00,000*3/9= 6,00,000= Q
 18,00,000*4/9= 8,00,000 =R
 Un marked applications: 13,88,000 – 11,00,000 = 2,88,0000
 2,88,000 * 2/9= 64,000
 288000*3/9= 96,0000
 288000*4/9=1,28,000

13. Solution
Particulars P Q R
Gross Liability 4,00,000 6,00,000 8,00,000
Less: Marked Application 3,00,000 3,50,000 4,50,000
Less: Firm Underwriting 50,000 60,000 70,000
Less: Unmarked application 64,000 96,000 1,28,000
Total Balance (14,000) 94,000 1,52,000
Less: negative balance (14,000) 6,000 8,000
Net Liability Nil 88,000 1,44,000
+ Firm underwriting 50,000 60,000 70,000
Total Liability 50,000 1,48,000 2, 14,000

14. Illus 5
 3,00,000equity share of XYZ co issued @ RS. 10 each. P,Q &
R appointed as underwriter in the ratio of 3:2:1. Firm
underwriting 20,000; 14,000& 10,000. applications received
for 2,40,000shares excluding firm underwriting .
Marked application of P,Q & R is 60,000; 50,000 & 60,000.
Compute the liability as regard the number of shares to be
taken up assuming that the firm underwriting is not given to
individual underwriters.

15. Working Notes:
 Gross liability:
 3,00,000*3/6= 1,50,000
 3,00,000*2/6= 1,00,000
 300000*1/6=50,000
 Unmarked application: 2,40,000 – 1,70,000= 70,000*3/6,
70,000*2/6; 70,000*1/6
 Firm underwriting: 44,000*3/6=22,000
 44,000*2/6=14,667
 44,000*1/6=7,333

16. Solution
Particulars P Q R
Gross liability 1,50,000 1,00,000 50,000
Less: marked application 60,000 50,000 60,000
Less: firm underwriting 22,000 14,667 7,333
Less: unmarked application 35,000 23,333 11,667
Total Balance 33,000 12,000 (29,000)
Manage negative balance 17,400 11,600 (29,000)
Net liability 15,600 400 Nil
+ firm underwriting 20,000 14,000 10,000
Total liability 35,600 14,400 10,000

17. Practice Illus 6:
R ltd. made a public issue of 1,25,000 equity shares of Rs. 100
each, Rs.50 payable on application. The entire issue was
underwritten by four underwriters as follows: A : 30%, B:
25%, C: 25% and D: 20%. Under the underwriters term, a
commission of 2% was payable on the amount underwritten.
The firm underwriting of 4,000, 6,000, Nil and 15,000. The
marked application of A: Rs. 24,000; B: 12,000; C: 20,000; D:
24,000.The applications were received for 90,000 shares.
Calculate the net liability and underwriter’s commission.