(a) When an entire issue is fully underwritten by a single underwriter:
In case, an issue is subscribed fully by the public, the underwriter is relieved from the clutches of any liability. Otherwise, if an issue is not subscribed entirely, the underwriter has to shoulder the liability for the members of shares or debentures that are not applied for by the public. That means the underwriter has to pay for such shares or debentures that are not subscribed by the public. Under this type of
underwriting, computation of underwriting commission is very simple and easy.
(b) When an entire issue is fully underwritten by more than one underwriter:
In case, an issue is fully subscribed by the public, the underwriters are free from any liability. They are entitled to receive a commission on their agreed ratio. Otherwise, if the issue is not subscribed fully, then the liability of each of the underwriters is determined by using the following format (specimen):
Statement showing the liability of the underwriters :
Illustration 2.3
Model: The whole issue is underwritten by two or more partners.
Jaya Ltd. issued 1,00,000 equity shares. The whole of issue was underwritten as:
A: 50%; B: 25%; C: 25%
Applications for 80,000 shares were received in all, out of which applications for 20,000 shares had the stamp of A, those for 10,000 shares that of B, and those of 20,000 shares that of C. The remaining applications for 30,000 shares did not bear any stamp.
You are required to determine the liability of the underwriters.
Illustration 2.4
Model: The whole issue is underwritten by two or more underwriters in an agreed ratio.
VRV Ltd. made a public issue of 1,00,000 equity shares of 10 each. The entire issue was underwritten by five underwriters as follows: P: 20%; Q: 25%; R: 30%; S: 15%; T: 10%
Applications bearing the rubber stamp of an underwriter are to be applied in relief of his liability.
As a result of the issue, the following applications were received:
Illustration 2.5
Devi Ltd. was formed with a capital of 20,00,000 in 10 shares, the whole amount being issued to the public. The underwriting of these shares was as follows: L: 70,000; M: 60,000; N: 40,000; O: 20,000; P: 6,000; Q: 4,000
All the marked application forms were to go in relief of the underwriters whose stamp they bear. The application forms marked by the underwriters were: L: 20,000; M: 45,000; N: 40,000; O: 15,000; P: 10,000; Q: NIL
Applications for 40,000 shares were received on forms not marked. Draw up a statement showing the number of shares each underwriter had to take up. [Madras University Modifi ed]
Note: The above notes are compiled for students preparing for BBA Hons programs at various universities in accordance with the National Education Policy (NEP)
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