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Underwriting of Shares and Debentures

This document discusses the underwriting of shares and debentures, explaining the need for underwriting, its meaning, and the legal provisions surrounding it. It outlines various types of underwriting agreements, the determination of underwriters' liabilities, and the accounting treatment for underwriting transactions. Additionally, it distinguishes between underwriters and brokers, and details the commission structure and disclosure requirements in relation to underwriting activities.

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103 views42 pages

Underwriting of Shares and Debentures

This document discusses the underwriting of shares and debentures, explaining the need for underwriting, its meaning, and the legal provisions surrounding it. It outlines various types of underwriting agreements, the determination of underwriters' liabilities, and the accounting treatment for underwriting transactions. Additionally, it distinguishes between underwriters and brokers, and details the commission structure and disclosure requirements in relation to underwriting activities.

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Tushar
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We take content rights seriously. If you suspect this is your content, claim it here.
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UNDERWRITING OF SHARES AND DEBENTURES TT in ccanese aL) After studying this chapter, the students will be able to understand: > Need for underwriting > Meaning of underwriting > Meaning of underwriting commission and legal provisions > Meaning of certain terms used in underwriting Types of underwriting agreement v Accounting treatment > Determination of liability of underwriters ao When a company wants to raise capital through issue of shares or debentures the public may not subscribe to the desired extent. There may be under-subscription of shares or debentures. The public may not take up shares or debentures of the company to the statutory required level. According to Section 39(1) of the Companies Act, 2013, no allotment of any securities shall be made unless the amount stated in the prospects as the minimum amount has been subscribed, Section 39(3) provides that if the stated minimum amount has not been subscribed and the sum payable on the application is not received within a period of 30 days from the date of issue of the prospectus, or such other period as may be specified by the SEBI, the amount received under Section 39(1) shall be returned within such time as may be Prescribed. vvv 5.1 1D DEBENT' ‘URES 5.2 UNDERWRITING OF SHARES AN} A d Allotment of Securities) Rules, 2014 4), B f the Companics (Prospectus an ote Sood of 15 a that in the above ee application money ey rep acs cranes Cn in > closure of the is uc, In case of failure 0 Y a AY Who a to oetn defaul shall jointly and ee Sa ee ae a a ier a further, the 4PI v L shal} at the rate of 15% per annum Further, the : tion mom e apse to ihe bank account from which the subscription ee eee According to SEBI Regulations, minimum requirement of ud dates latory for bet public and rights issue, If minimum subscription 15 not receive oe P riod of days from the close of the issue, the application money ae i eG z e yore i the money is not returned within 10 days, after the expiry sucl lays, the compan, interest @ 15% per annum from the 70th day. y ed aspecialized group of persons (natural and artificig i shall be liable to pay Toovercome the above ris! called underwriter who tal éxisting shareholders in cas not subscribed by the there has emerg' lic offer. ke up shares or debentu .¢ of rights issue and by the pul as the case may be, res, lic in case of publ: cco MEANING OF UNDERWRIT ‘ing is an agreement, with or wi when the existing sharehol he securities offered to th thout conditions, to subscribe to the securities ders of such body corporate or the public em (SEBI Regulations, 2009). das a contract between the company and the under. Thus, underwrit hich the underwriters agree to take up the whole ora portion of the shares writers under w or debentures floated but not subscribed by the investing public in consideration of un- is the application of the principle derwriting commission. In other words, underwriting i of insurance to the issue of shares or debentures where an undertaking is given by the underwriters to take up the shares or debentures not subscribed by the public or the existing shareholders, as the case may be. Asexplained: above, theindividuals, partners! underwriting a public issue or rights issue of shares debentures may be underwritten by ers’. An issue of shares or Generally, it is underwritten by a number of underwriters, of issue is large, as it involves more risk. Some specialised financi: brokers play an active role in underwriting shares and debentures of companies. NG" COMMISSION AND LEGAL Underwriti of a body corporate do not subscribe to tl iting may be defines hip firms, joint stock companies or institutions s or debentures are called ‘underwrit one or more underwriters. particularly when the size al institutions and big Le Meaning of Underwriting Commission: There e ; Thy pesmuneration payable to the underwriters for underwriting the issue of shares ebeai esofa company iscalled underwriting commission. The underwritin; commission epee el a specified rate on the issue price of the whole of the shares fe deben' .n irrespective of the fact that whole of the issue may be subscribed by #"° public. ~~ UNDERWRITING OF SHARES AND DEBENTURES. 5.3 ing commission is not payable on the sha nde" rectors, their friends and business wyeriy in addition to the brokerage. usual taken up by the promoters, em- The underwriting commission social visions: Section 406) permits a company to pay comm gal Prov aith the subscription of its securitic onnecti ion to any person in subject to such conditions as may be ibe yee the Companies (Prospectus and Allotment of Securities) Rules, 2014 provides pule b “omnpanty may pay commission to any person in connection with the subscription phat ae * yrement of subscription to its securities, whether absolute or conditional, subject arprocureme bserip' or Ot lowing conditions: gothe 1. Authorised by the Articles - The payment of such commission shall be authorised * in the company’s articles of association. Source- The commission may be paid out of the proceeds of the issue or the profits of the company or both. Maximum Rate of Commission in case of Shares - The rate of commission shall not exceed in case of shares, 5% of the price at which the shares are issued or a rate authorised by the articles, whichever is less. = Maximum Rate of Commission in case of Debentures - The rate of commission, in case of debentures, shall not exceed 2' % of the price at which the debentures are issued, or as specified in the company’s articles, whichever is less. ;. No Commission - There shall not be paid commission to any underwriter on secu- tities which are not offered to the public for subscription. we Disclosure of Amount and Rate - The Prospectus of a company shall disclose - ( The name of the underwriters; (@® The rate and the amount of commission payable to the underwriter; and (ii) The number of securities which are to be underwritten or subscribed by the underwriter absolutely or conditionally. Copy of the contract to the Registrar - A copy of the contract for payment of com- mission is delivered to the Registrar at the time of delivery of the prospectus for registration, ee remuneration payable to the underwriters for underwriting the issue of shares or ebentures of a company is called underwriting commission. Brokera, subs ‘ge is the amount payable to the brokers who merely procure or try to procure ul cription to the shares or debentures. > wa \NIRWRITING OP SHARES AND DEBENTURES DISTINCTION BETWEEN UNDERWRITERS AND BROKERS as awn he individuals, partnership firms, LPs, joint stock compan, awial institutions writing a public issue or rights issue of shares or deber® 6 awe called ‘underwriters’, Brokers merely procure or try to procure Subscripg to the shares or debentures. ion 2X Respor debentun bility - Underwriters take up the responsibilty to take up the shar, riot subscribed by the public or the existing shareholders, as the" a « may be. Brokers do not take up the responsibility to take up shares or debenty, ‘ay be, not subscribed by the public or the existing shareholders, as the case m; DISCLOSURE IN BALANCE SHEET The unwritten off portion of the underwriting commission, brokerage and other expen, es on issue must be disclosed in the Balance Sheet. Unwritten portion of underwrig, commission will be shown under the head “Other Current Assets” “Other Non-Cy, Assets” depending upon whether the amount will be amortised within 12 months/afy, 12 months from the date of the balance sheet. It may also appear under both the line items. The details will be shown in the Notes to Accounts. SUB - UNDERWRITERS teh ie In order to spread the risk of under-subscription, the main underwriter(s) may enter inta subsidiary contracts with certain persons. These underwriters working under the main underwriter(s) are called sub-underwriters. The company is not a party to these contracts MARKED AND UNMARKED APPLI When the issue of shares or debentures is underwritten by more than one underwriters, it is usual that the applications for shares or debentures sent through the underwriters bear the stamp of the respective underwriters. If the applications do not bear the stamp of the underwrites, it would be very difficult for the company to determine how many applications have been received through a particular underwriter and it would face » problem in determining the liability of the different underwriters, Marked Applications - Mark derwriter. The benefit of m: whose favour the applicati ed applications are those which bear the stamp of an un- arked applications is given to the particular underwriter in ions have been marked. Unmarked Applications - Unmarked applications are those which do not bear the stamp of an underwriter, The unmarked applications are received directly from the public. The benefit of unmarked ap, plications is given first to the company to the extant the issue is not underwritten by the underwriters in case of partial underwriting. If still there is 2 surplus, the benefit of such surplus unmarked applications is given to the underwriters. When the entire issue of shares or debentures is underwritten by only one underwriter or when the issue is fully subscribed, the distinction between parked and unmarked applications becomes immaterial, UNDERWRITING OF SHARES AND DEBENTURES ND PARTIAL UNDERWRITING ae ee a = oe complete Underwriting - In case of full underwriting the whole of the issue of fOr ‘debentures iS underwritten by one or more underwriters. For example, if A pares es 2 public issue of 50,00,000 Equity Shares of & 10 cach at a premium of 7490 yd we and the entire issue is underwritten by P, Q and R in the ratio of 2:2:1, itis full sei erwritin ath > _fullunderwriting, the benefit of unmarked applicationsis given to the underwriters. as ce u nderwriting - When a part of the issue of shares or debentures is underwritten, pit al underwting. For example iT Ld makes a public issue of 80,00,000 iris Shares of & 10 each at a premium of 740 per share and 72,00,000 Equity Shares si ‘prwritten by D, Band F in the ratio of 3:2:1, it is called partial underwriting. re partial underwriting, the benefit of unmarked applications will be first given rhe company: In the above example, the benefit of to the unmarked applications to jot ay 00 (Le: 80,0,000 minus 72,00,000) shares will be given to the company. exert ot of surplus unmarked applications if any, will be given to the underwriters. The _ ae required totakeany hares but will get underwriting | com iin im a written with some Firm Unde Z 2. When the whole issue is Fully Under’ If the whole issue has been unde! underwriting, the liability of the un a «of firm underwriting () When the benefit of firm underwriting is give! is not given ing (a) When the benefit of firm underwrit nto os firm underwriting is treated as unmarked applications @ gross liability , The liability of the underwriter consists of ( net underwriting. The following steps are taken to deter Step 1. Calculate gross liability of the underwriter: given. Step 2. Subtract marked applications (excl If some of the resultant figures are negativ in the ratio of gross liability inter se. i f underwriters with some written by a number o! lk i nderwriters can becalculated in the following two way. snot given to individual underwriter, .n to individual underwriters. to individual underwriters: In th, ind divided in the ratio (@ When the benefit liability as per agreement and (ii) fim rmine the liability of the underwriters sin the agreed ratio if it is not already lading firm underwriting) from gross liability, e, then divide the total of the negative figures Step 3. Compute the number of unmarked applications as follows : Number of shares applied (excluding firm underwriting) mm Less: Marked applications (excluding firm underwriting) a om Unmarked applications by public ox Add: Firm underwriting xxx Total unmarked applications — Divide the unmarked applications as cal i culated ab it iabili Se eee ove in the ratio of gross liability unless, If sor i ee the dena figures are negative, then add all the negative figures and divide ee a ee raving positive figures in the ratio of gross liability er Se. Repeat Jal s are positive and, this stage represent net liability excluding firm ew ees Step 4. Add firm unde) ability. The resultant figures represe! writin, ern ig to the net liability, igi Ce | picertparenrconcunnercn me anannscgenme ee d UNDER\ N WRITING OF SHARES AND DEBENTURES eae oo — Notas ae ith some fir FF m underwriting 1 ‘indoritileny iting and the benefit of firm un- [ake issue is Fully underwritten jen ing is not given to the individual 1 \¢ @ firm underwriting is treated liability. The liability of an und, anderwriting. ip inthe benefit of firm underwritin, as unmarked applications and divided in the ratio of gross - Srwriter is total of (a) net liability as per the agreement; and (b) firm g is given to individual underwriters : In this unmarked applications. Firm underwriting is ely. In the absence of any information in the ae ed benefit of firm underwriting is given ¢ s effect should be given. The liabili to Morwriter consists of (9 net liability as Sond (Dine tadecaciire ; per the agreement; and (ii) firm underwriti the following steps are taken to compute the liability of the ee ne gtep 1. Calculate gross liability of the underwriters if it is not already given. step 2. Subtract marked applications (excluding firm underwriting) from gross liability. siep 3. Compute the number of unmarked applications as follows: « jestion, the question may be solved assur e individual underwriters and a note to 1 umber of shares applied (excluding firm underwriting) xXx ess: Marked applications (excluding firm underwriting) “ Unmarked applications by public = Divide the unmarked applications as calculated above in the ratio of gross liability. Step 4. Subtract shares underwritten firm from the respective figures. ifsome of the resultant figures are negative, then divide their total between the under- writers having positive figures in the ratio of gross liability inter se. Repeat this until all the figures are positive and/or zero. The resultant figures at this stage represent net liability excluding firm underwriting. The order of Step 2, Step 3 and Step 4 may be interchanged. Step 5. Add firm underwriting to the net liability. The resultant figure represent total liability of underwriters. Notes When the issue is fully underwritten with some firm underwriting and the benefit of firm un- derwriting is given to the individual underwriters: () Firm underwriting is treated as unmarked applications. (i) Firm underwriting is credited to individual underwriter parately. (ii, The ability of an underwriter is total of (@) net ability as per the agreement; and (0) firm underwriting, ILLUSTRATION 4: (When the issue is fully underwritten with some firm underwriting and the benefit of firm underwriting is not given to the underwriters) GG.Lid. issued 40,000 shares which were underwritten as follows: P: 24.000 shares; Q : 10,000 shares and R : 6,000 shares. rhe underwriters made applications for Mn * underwriting as under : ND DEBENTURES spe total subscriptions excluding i i 7 von atuares; and R : 4,000 shares, i ached a . 1,200 share ea 70,0 shares. TH are ions yi” applications) ware prepare a stateme ing net lah " 7 and R: 2,000 sha LNDERWRITING OF SHARES A writing (ine P 4,000 shares of the underwriters, ‘ERS’ LIABILITY SOLUTION: writ! grareMENT SHOWING THE UNDER ws ations, Dene {awh firm alerting shares be a vidual underwriters) ; vrtting 18 10 of fie indenting not BET KTR EE Be Q R_| Toa snes 74,000 10,000] 6,000] 40,09) | 8,000| 2,000| 14,09) 2,000 | 4,000] 26,000 Less: Marked applications (excluding firm underwriting) lance : ; a vyamarked applications 14400 the ralo of gross Tia) 49] 3,600] 2,160] 14400 bility ie, 12:53 (WN) 71,360] -1,600| 1,840] 11,600 Balance io of ) Surplus subscription of @ a toPandRintheratioO"} | 459 / +1600) -320 . ss liability inter sé, Le z = net tbilty Texeluding firm underwriting) 10,080 =| 4520) 11.600 “Add Firm underwriting 3,200| 1,200 | 4,000} 8,400 Total liability 73,280] 1,200] 5,520 | 20,000 Working Note Calculation of total unmarked applications No. ‘Total subscription (excluding firm underwriting) 20,000 “Less: Marked applications (excluding firm underwriting) 14,000 ‘Unmarked application by public . 6,000 ‘Add: Applications under firm underwriting 8400 ‘Total unmarked applications 14,400 ALTERNATE SOLUTION: STATEMENT SHOWING THE UNDERWRITERS’ LIABILITY (When frm anderuting shares are not treated a8 unmarked applications, i.e., nnefit of firm underwriting Is given to individual underwriters) aI TT TET pay oy S sks Number of Share Gross liability P Q R Loss: Marke aa 24,000 Less: Marked applications (excluding firm tnderweiting) 4,000 fea ; 8,000 | 2,000 sot rereee 20,000 { 2,000 | 4,000 UNDERWRITING OF SHARES AND DEBENTURES intone Number of a rp |o@ Fares underwritten firm (Treated = marked) | 3,200] 1,200 palance 16,800] 800 v 12353 OWN) palace 0 SSPE) oversubscription of Q and R transferred to P 3,600| 1,500| 900] 6,000 13,200} -700| -900| 11,600 -1,600| +700 | +900 : 11,600 Nil Nil} 11,600 surplus oF . pility (other than firm underwriting) Net lial Firm underwriting ade 3,200| 1,200] 4,000| 8,400 otal liability 14,800 | 1,200 | 4,000 | 20,000 ‘Working Note No. Jotal subscriptions (excluding firm underwriting) 20,000 [ess Marked applications (excluding firm underwriting) 14,000 Unmarked applications by public 6,000 {LLUSTRATION 5: (When the issue is fully underwritten with some firm underwriting and benefit offirm underwriting is not given to individual underwriters) Kashvi Lid. came out with an issue of 20,00,000 equity shares of % 10 each at par. 5,00,000 shares ‘yere issued to the promoters and the balance offered to the public was underwritten by three underwriters - Anand, Vijay and Ashok - equally with firm underwriting of 50,000 shares each. Subscriptions totalled 12,97,000 shares including the marked forms which were : snand - 425,000 shares; Vijay - 4,50,000 shares; and Ashok - 3,50,000 shares. The underwriters had applied for the number of shares covered by firm undertaking. The amounts payable on application and allotment were Rs. 2.50 and Rs. 2 respectively. The agreed commission was 5%. Passsummary journal entries for (a) the allotment of shares to the underwriters; (b) the commission duc to each of them; and (¢) the net cash paid and/or received. Note: Unmarked applications are to be credited to the underwriters equally. Benefit of firm underwriting is not to be given to individual underwriters. SOLUTION: In the books of Kashvi Ltd. Journal Z ee ee Bank A/c (1,50,000 x & 2.50) Dr. 3,75,000 To Shares Application A/c (Being the application money received on firm applications for 150,000 shares @ % 2.50 each from Anand, Vijay and Ashok equally) 3,75,000 5.16 Date UNDERWRITING OF SHARES AND DEBENTURES LE Particuta : Anand (50,000 X@2) Vijay (50,000 X & 2) Dr. Ashok (50,000 x ¥ 2+53,000 X & 4.50 Dr. Share Application A/c (1,50,000 X & 2.50) Dr. To Share Capital A/c ters - 50,000 to (Being the allotment of shares to underwri ),000 Anand; 50,000 to Vijay and 1,03,000 to Ashok; application ‘and allotment money credited to Share Capital Account 1,00,000 3,38,500 3,75,000 1,00,000 ay 9.13509 as per Board's Resolution No. dated ....) mission A/e (15,00,000 X 10x 5/100) Dr. Underwriting Com To Anand To Vijay To Ashok srwriting ‘commission payable to Ariand, (Being the under Vijay and Ashok @ 5% on the amount of Shares under- 7,50,000 2,50,000 2,50,000 2,50,000 written) ‘Anand (2,50, 000 - € 1,00,000) Dr. Vijay € 2,50,000 - & 1,00,000) Dr. To Bank A/c (Being the amount paid to Anand and Vijay in final settle- ment of underwriting commission less amount payable on shares allotted) 1,50,000 1,50,000 3,00,000 Bank A/c (3,38,500 - 2,50,000) To Ashok (Being the amount received from Ashok on shares allotted less underwriting commission payable to him) 88,500 88,500 Working Notes (2) Calculation of Liability of Underwriters - (Benefit of firm underwriting not given to indi- vidual underwriters) Number of Shares Anand | Vijay | Ashok a 5,00,000 | 5,00,000 | 5,00,000 Less: Marked applications (excluding firm underwriting) 4,25,000 | 4,50,000 |_3,50,000 Balance 75 50K 50, ; : 75,000] -50,000 | 1,50,000 Less: Unmarked applications 2,22,000 allotted in the ratio of gross liability, i.e,, equally (W. N. 2) 74,000] 74,000} 74,000 Balance “ 7 : 1,000] -24,000] 76,000 Surplus of Vijay allocated to others in the rati tio of gross liabili mie gross liability | -12,000 Balance -11,000 +24,000 | _-12,000 Nil 64,000 UNDERWRITING OF SHARES AND DEBENTURES SAT ‘and allocated to Ashok cus of BP a ; so pilty excluding firm underwriting Nil Nil| 53,000 ‘Wes underwriting 50,0 sa abit 50,000] 50,000 | 1,03,000 jation of total unmarked applications goal a) cate tion (excluding firm underwriting) otal subscrip' ; . plications (excluding firm underwriting) sess Marked 21 A arked applications by public ada Applications under firm underwriting roxal unmarked applications n of amount payable by underwriters (@ Caleulatio Particulars ‘Anand | Vijay _| Ashok Taal lability, +e, the number of shares to be subscribed 50,000] _ 50,000 | 1,03,000 z z z Amount payable @ 4.50 per share as application and allotment money 2,258,000 | 2,25,000 | 4,63,000 zs: Amount paid on firm application for 50,000 each @ € 2.50 |_1,25,000 1,25,000 | 1,25,000 1,00,000 | 1,00,000 | 3,38,500 Balance payable by underwriters Underwriting commission payable to underwriters @ 5% 2,50,000 | 2,50,000 | 2,50,000 Amount payable by the company 1,50,000 | 1,50,000 : Amount receivable by the company - - |__ 88,500 Note: Both application and allotment money due has been adjusted with the underwriting com- nisin, ( Total allocation of Shares No. Marked applications by public 12,25,000 Unmarked applications by public 72,000 Total liability of underwriters 2,03,000 15,00,000 ae sually the total liability of the underwriters will be different when benefit of firm under- ratig seven and when itis not given to individual underwriters, However, the above illustration, sola ss ability is equal and ratio of firm underwriting i also equal. Therefore, in this case, The ly of the undervriters will be same when the benefit of firm underwriting is not given inden dividual underwriters and when the benelit of firm underwriting is given to individual niters, This is shown below: ae EBENTURES LIABILITY | underwriters) UNDERWRITING OF SHARES AND D) (OWING UNDERWRITERS derwriting 1s given to individual 5.18 STATEMENT SH m unt (When benefit of fir aS. j Anand, | Anan 7 5,00,000 Gross liability . a 50,000 aco lisa sna firmunderwriting) | 4251 50, 25,009 Juding firm un 2900! 50,000} 1,50,000| 2,75,099 75,000 Balance 7 Fen parkedappiatons72 000 ditibuted caval 24000| 24,000] _24,000| _ 72.009 i 51,000] 26,000] 1,26,000] 2,03,009 50,000| _50,000| _1,50,009 ed applications (exe LessMa Balance Less: Firm underwriting 50,000 Balance/(Surphus) 4,000 | (24,000)} 76,000) 53,009 Surplusof Vijay distributed to Anand and Ashok equally | (12,000) |_24,000 12,000 Balance/Surplus (11,000) Nil] 64,000 Surplus of Anand allocated to Anand topically 11,000 - | 1,000) Net liability excluding firm underwriting Nil Nil] 53,000} — 53,000 Add: Firm underwriting 50,000} 50,000 _ 50,000 Total liability 50,000 | 50,000 | 1,03,000 | 2,03,000 Calculation of unmarked applications = || No.of Shares Total subscriptions (excluding firms underwriting) oa 000 Less: Marked applications (excluding firm underwriting) 2: 5, Unmarked applications by public am 72,000 ILLUSTRATION 6: ter eae (When whole of the issue is underwritten by the underwriters with some firm Shuchi Limited issued to public public 1,50,000 equit payable along wit 7 50,000 equity shares of & 101 ytd eke sene R e jerwritten equally by Ali, Bali and Charlie f ssi ved oc pa deal fora commission of 5 per cent. Applications for 1,40,000 shar 40,000 shares were re- Underwriter = . | plicas __ Marked a Ff cations | __ Marked Applications _|__ Total Ba eo 40,000 45,000 Unmarked Applications oe 34000 570 10 " 7 37,000 You are requi Cr red {00 preparea statement hi showi of firm under Writing i . 8 IS not given to in divia, a liability of the nea w le inderwriters: ‘rwriters assuming that 'ers; and (ij journalise the above ppp UNDERWRITING OF SHARES AND DEBENTURES ie as including cash) in the books of Shuchi Limited. While calculating the amount due toor el from underwriters adjust only the application money with the underwriting commission. va! f at the benefit of firm: underwriting is not given to individual underwriters) so culation of total unmarked applications @ No. abscriptions (excluding firm underwriting) (140,000-13,000) 1,27,000 otal a ed applications (excluding firm underwriting) (40,000 + 46,000+34,000) —_1,20,000_ irked applications from public 7,000 cations unde frm underwriting 13,000 ue ‘marked applications "20,000 eS gTATEMENT SHOWING THE LIABILITY OF THE UNDERWRITERS Gross liability 50,000} 50,000} $0,000 | 1,50,000 Les Marked applications (excluding firm underwriting) | _40,000| 46,000} 34,000 | 1,20,000 10,000} 4,000] 16,000} 30,000 Balance ‘Unmarked applications 20,000 allocated to Ali and Chatlie equally as per agreement 10,000 -| 10,000] _ 20,000 Net liability (excluding firm underwriting) Nil} 4,000] 6,000] 10,000 (jaé-Firm underwriting 5,000| 5,000] 3,000] _13,000 Total liability 5,000| 9,000] 9,000] 23,000 (i) Amount Due from and due to underwriters [ hariie™ Shares to be subscribed, ie, total liability 5,000} 9,000] 9,000 z z z Amount payable @ Rs. 60 per share on application 3,00,000 | 5,40,000 | 5,40,000 ess: Amount paid on application @ Rs. 60 each on shares ap- Bled firm, 3,00,000 | 3,00,000 | 1,80,000 Balance payable Nil | 2,40,000 | 3,60,000 Less:Underwriting commission @ 5% on nominal value of shares underwritten 2,50,000 | 2,50,000 | 2,50,000 Amount receivable/ (payable) (2,50,000) | (10,000) [ 1,10,000. Note: Only application money has been adjusted with underwriting commission : (iti) Total allocation of shares No, Marked applications by public os ava applications by public eed al Liability of underwriters Sr 1,40,000 ee 5.20 HARES AND DEBENTURES jut Limited UNDERWRITING OF 5} the books of Shue Journal In eu an nk A/c (1,40,000 X & 60) res Application A/e (Being the allou | % 40 each) lotment money received on 1,50,000 shares @ To Sh sing the applicati receivedon 1.27,000shares from Caner enantio @ RESIS 2,40,000 | Bali 4,000 x € 60) 3,60,000 Charlie (6,000 * 60) Share Application A/c (1,40,000 60) 84,00/000 To Equity Share Capital A/c | 90,00,009 (Being the allotment of shares to underwriters : 5,000 t¢ Ali, ee Mali and 9,000 to Charlie; application mon’? credited 2 Shave Capital as per Board's Resolution No. dated...) ‘Underwriting Commission A/c Dr. 7,50,000 To Ali 2,50,000 To Bali 2,50,000 To Charlie 2,50,000 (Being the amount of commission payable to underwriters @ 5% on shares underwritten) Bank A/c ® 3,60,000 - € 2,50,000 Dr. 1,10,000 ‘To Charlie 1,10,000 {Being the balance received from Charlie after adjusting AlA/c 2,50,000 Bali & 2,50,000 - 2,40,000) 10,000 To Bank A/c ye (Being the balance of underwriting commission paid after _ : using amount payable on application) re Allotment A/c (1,50,000 To Share mia Ale ae Bs Sooo na othen 00, oa allotment money dueon 1,50,000shares @%40 each) “ ToShare Allotment A/c Dr. 60,00,000 60,00,000 ‘alculation of total liabi n to in ability if the benefit of firm underwriting is given to individual under vidual under’ UNDERWRITING OF SHARES AND DEBENTURES, 5.21 sion oF unmarked applications cate No. scription (exchuding firm underwriting) 1,27,000 1 ed applications (excluding firm unclerwriting) 1,20,000 pss Mar ~ 7,000. STATEMENT SHOWING THE LIABILITY OF UNDERWRITERS All Bali\ liability 50,000 | 50,000 Gros Hed applications (excluding firm underwriting) | 40,000 46,000 = 10,000) 4,000 = “Tamarked applications 7,000 divided equally between esd Charlie as per agreement 3,500 -| 3500] 7,000 palance 6,500| 4,000 12,500] 23,000 ess Firm underwriting 5,000} 5,000} _3,000| 13,000 Balance (OF Surplus) 1,500| -1,000/ 9,500) 10,000 credit for Bali's oversubscription to Ali and Charlie in the ratio of gross liability, ic, equally -500 | +1000 -500 : Ne liability (excluding firm underwriting) 1,000 Nil] 9,000} 10,000 \4dd-Firm underwriting 5,000| 5,000| _3,000| 13,000 Total liability 6,000| 5,000[ 12,000 | 23,000 Jmount Due from and due to underwriters Shares to be subscribed, i.e., total liability 6,000, 12,000 z z z 3,60,000 | — 3,00,000 | 7,20,000 Amount payable @ % 60 per share on application 3,00,000 3,00,000 | 1,80,000 Less: Amount paid on application @ ® 60 per share on the shares applied firm Balance payable 60,000 Nil] 5,40,000 Less: Underwriting commission @ 5% on nominal value of | 2,50,000} —2,50,000 | ,50,000 shares underwritten Amount receivable/(payable) 1,90,000) | (2,50,000) | 2,90,000 Note: Students can now pass the journal entries in this case. ILLUSTRATION 7; (When whole of the issue is underwritten by the underwriters with some firm underwriting and benefit of firm underwriting is given to individual underwriters) nose Ltd. has authorised capital of € 25,00,000 divided into 1,00,000 equity shares of € 25 each. .¢ Company issued for subscription 25,000 shares at a premium of & 10 each. The entire issue Was underwritten as follows : A- 15,000 shares (firm underwriting - 2,500 shares) B-7,500 shares (firm underwriting - 1,000 shares) | See 5. a UNDERWRITING OF SHARES AND DEBENTURES C= 2,800 shares (lim underwriting - 500 shares) Out of the total issue, 22,500 shares including firm underwriting were subscribed. The ¢, log Were marked forms : i A- 8,000 shaves; B - 5,000 shares; C - 2,000 shares % Calculate the liability of cach underwriter. Solution ; (If the benefit of firm underwriting is given to individual underwriters) Calculation of unmarked applications Total subscriptions (excluding firm underwriting) hs Ny (22,500 - 2,500 - 1,000 - 500) 509 Less: Marked applications (excluding firm underwriting) (8,000 + 5,000 + 2000) - (2,500 + 1000 + 500) 1 Unmarked applications = STATEMENT SHOWING THE LIABILITY OF UNDERWRITERS ~~ S< Number of Shares as Ae A B c [nat 15,000 7,500] 2,500 25 gp Gross liability 8,000 | 5,000 2,000 | 1599 Less: Marked applications (excluding firm underwriting) and applications under firm underwriting Balance Less: Unmarked applications 7,500 as calculated above divided in the ratio of gross liability, ie, 6 3 :1 7,000 | 2,500] 500} 10009 4,500 | 2,250] _750| 7,500 2,500] 250] -250] 2500 Balance Credit for C’s over subscription to A and B in the ratio of gross liability iter se, ie, 2:1 -167| -83| +250] Net liability 2,333| 167| — Nil] 2,500 Add : Liability in respect of firm underwriting 2,500 | 1,000} 500] 4,000 Total liability 4833 | 1,167{ 500] 6500 Assumption :; Marked forms include firm underwriting also. ILLUSTRATION 8: (When the whole issue is underwritten with some firm underwriting and the benefit of firm underwriting is given to individual underwriters) CTF Ltd. issued 10,000 equity shares of € 100 each at a premium of € 20 per share. The entire issue was underwritten as follows : C - 5,000 shares (firm underwriting 1,000 shares) T - 3,000 shares (firm underwriting 500 shares) F - 2,000 shares (firm underwriting 500 shares) Shares applied for were 9,000, the following being the marked forms including firm underwnt® C - 3,500 Shares; T - 1,400 Shares; and F - 1,600 Shares yr sje was aS follows : On application :& 30; and on allotment (including premium) : © 50; ot all which was duly made and all allottees including the underwriters paid the money. 0 ane? ine liability of each underwriter assuming that the benefit of firm underwriting is given mule derwriters and state the commission each will get at the rate of 2.5%. Also pass cide) Sournal entries recording the above transaetions, While calculating th mount due ean lerwriter’s adjust only application money with the underwriting commission. UNDERWRITING OF SHARES AND DEBENTURES =e c pene wd gato STATEMENT SHOWING THE LIABILITY OF UNDERWRITERS 5,000 | 3,000 2,500| 900 ce 2,500 | 2,100 Ba parked application 2,500 as calculated above allocated in the Less gross liability, ie, 5:3 :2 1,250} 750| 500 ee 1,250) 1,350] 400 pee underwriting 1,000] 500] 500 Balance (or Surplus) Fy 250 850} -100 saps of F allocated to C and T in the ratio of gross liability inter se, ie d:3 -63 -37 | +100 erlibity excluding firm underwriting 187] 813 z ‘add :Firm undervariting 1,000] 500] 500 Total liability 1,187 | 1,313 | 500 () Calculation of marked applications ¢:3500-1000 = 2500; T : 1,400-500 = 900; F : 1,600-500 = 1,100 Total - 25,00 + 900 + 1,100 = 4,500 shares (i) Calculation of unmarked applications No. Total subscription (excluding firm underwriting) (9,000) - (1,000 + 500 + 500) Less: Marked applications (excluding firm underwriting) Unmarked applications by public (i) Caleulation of amount due from or due to underwriters total liability) 1,187| 1,313 500 z zg zg cant estble @ 30 per share on application 35,610 | 39,390| 15,000 ount paid on firm application @ € 30 30,000 | 15,000] 15,000 > AND pEBENTURES UNDERWRITING OF SHARES Balance payable Less: Underwriting come Amount payable to underwriters rom underwriter 1) money has been adjust mission @ 2.5% of issue PIC Amount re ed with the underwriting ‘commission, ~~ Note : Only application mo: In the books of CTF Ltd. Journal = WB : Date Partieutars Le ; a RoR Bank A/c (9,000 X & 30) a 70,000 To Equity Share Application Ale 2.70.00 (Being the application money received on 9,000 equity shares including firm application for 2,000 shares) @ 30 each) C's A/e [(1,187- 1,000) X Rs. 30] Dr. 5,610 T's A/c [(1,313-500) X Rs. 30] Dr. 24,390 Equity Share Application A/c Dr. 2,70,000 ‘To Equity Share Capital A/c ((9000 + 187 + 813) 3,00,000 30] Geing allotment of shares to underwriters : 1,187 to C; 1313 to T and 500 to T; and transfer of application money to Share Capital Account) Underwriting Commission A/c Dr. 30,000 To C's A/e 15,000 To T's A/e 9,000 To F's A/c 6,000 (Being the amount payable to underwriters as underwriting commission @ 2.5% of the issue price of shares underwritten) Bank A/e Dr. 15,390] - ToT’s Ase 15,390 (Being the balance amount due on share application firm under- writers after adjusting underwriting commission) Csale Dr. 9,390 P's A/c a eenn To Bank A/e 15.390 (Being the amount paid to C and Tin respect of underwriting com- mission after adjusting share application money due from them) UNDERWRITING OF SHARES AND DEBENTURES quit Fa To Equity Share Capital A/c ‘To Securities Premium A/c peng the allotment money due on 10,000 equity shares @ 50 | | per sate) pank A/C Dr. |” qo Equity Share Allotment A/c | geing the allotment money received on 10,000 shares @ & 50 | ber share in full) ‘guity Share Final Call A/e [Bauity Dr. To Equity Share Capital A/c | geing the final call money due on 10,000 shares @ € 40 each) | Being the Hal co Money CUE On 10,000 shares @ 40 each) | [Bank a/e | To Equity Share Final A/c (Geing the receipt of final call money on 10,000 shares @ & 40 each in full) Dr. 5.25 3,00,000 2,00,000 5,00,000 5,00,000 4,00,000 4,00,000 4,00,000 4,00,000 [JUSTRATION 9: (When entire issue is underwritten with same firm underwriting and benefit iff underwriting is given to the individual underwriters). Nsrayan Chemicals Limited planned to set up’ a nit for manufacture of bulk drugs. For the pur- qoseof financing the unit the Board of Directors have issued 15,00,000 equity shares of 10 each. 306 of the issue was reserved for promoters and the balance was offered to the public, Aditya, Divan and Anoop have come forward to underwrite the public issue in the ratio of 3:1 :1 and also agreed for firm undertaking of 30,000; 20,000 and 10,000 shares, respectively. The underwriting commission was fixed at 4%, The amount payable on application was % 2.50 per share. The details cf subscriptions are : ‘ Marked forms of Aditya Marked forms of Diwan Marked forms of Anoop Unmarked forms 5,50,000 Shares 2,00,000 Shares 1,50,000 Shares 50,000 Shares (@ You are required to show the allocation of liability among underwritets with workings. (> Pass journal entries in the books of Narayan Chemicals Limited : (9 For underwriters’ net liability and the receipt of payment of cash to or from underwriters, (i) Determining the liability towards the payment or commission of the underwriters. S “lion: (If the benefit of firm underwriting is given to individual underwriters) Assume that marked forms do not include applications under firm underwriting. bh ANTURES sno oF SHARES AND PPB 5.26 UNDERWRITING of SHAI iapuLsty AMONG UNDERWRITERS (a) STATEMENT OF ALLOCATION OF LTT eal TATRA . a piwart : z of Particulars Me al share) | of Shares) | [Shares : ano] 20000 210,000] 10,50,05)

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