Question

give journal entries
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Answer 1

Answer:

Underwriting is an agreement, with or without conditions, to subscribe to the

securities of a company when existing shareholders of the company or the public do

not subscribe to the securities offered to them.

When a company goes in for an initial public offer (IPO), it may face certain uncertainty about

whether its offer of shares or other securities will be subscribed in full or not. As per SEBI

Guidelines 14(4)(b) , it isrequired that if the company is not able to collect 90% of

the offer amount, then it needsto compulsorily return the money to those

who have subscribed to the shares and causing lot of issue expensesto go waste. This

uncertainty could be avoided by the help of a specialised group of risk-redeemers — called

Underwriters.

2. UNDERWRITING COMMISSION

It may be paid in cash or in fully paid-up shares or debentures or a combination of

all these.

Companies Act, 2013 provides that payment of commission should be authorized by Articles of

Association and the maximum commission payable will be asunder:

In case of shares 5% of the issue price of the shares

In case of debentures 2 % of the issue price of the debentures

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

employees, directors, their friends and business associates.

Commission is payable on the whole issue underwritten irrespective of the fact that

whole of the issue may be taken over by thepublic.

Commission is calculated on issue price unless otherwisementioned.

3. SOLE UNDERWRITERS AND JOINT UNDERWRITERS

3.1. Sole Underwriters:

When the issue is underwritten by only one underwriter, such underwriting is

termed as ‘Sole Underwriting’.

For example, if an issue of 1,00,000 shares of Rs.10 each of X Ltd is

underwritten by A, it is the case of Sole Undewriting.