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Under writing commission

sai krishna (Student) (186 Points)

28 February 2008

Hi to all

Can any one explain me about under writing commission in detail

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3 Replies

CA Bhaskar Reddy (Unemployed) (126 Points)
Replied 28 February 2008

Hi
Underwriting concept is related to Public companies which go for issue of shares for public subscriptttion.
Generally if company issues shares there is no guarantee that all the shares issued are subscribed. So company chooses UNDERWRITERS who takes over the shares in case of under subscriptttion of shares.
For that they will be paid some commission. This will be paid on the no. of shares they have agreed to takeover in the event of under subscriptttion. This is called UNDERWRITING COMMISSION.

EG: suppose a company A is issuing 100 shares, if the company appoints the underwriters to take over 50 shares, then the co. has to pay commission on 50 shares disregarding the fact that the shares are fully or partly subscribed.

Underwriting is of 2 types
1. Full underwriting
2. partly underwriting

Commission will be calculated on the face value of the shares. It cannot exceed 2.5% on the face value of a Debenture& in case3 of Shares it is 5%.
Commission may be paid in cash, or by allotment of shares or by partly cash & partly in shares.

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CA. Kirti S. Ganatra (Service) (1461 Points)
Replied 28 February 2008

Good described

CA. Abhishek K. Pandey (Manager (Advance)) (901 Points)
Replied 06 March 2008

UNDERWRITING COMMISSION IS A COMMISSION PAID BY THE COMPANIES TO "UNDERWRITERS" UNDER A CONTRACT THAT THEY WILL SUBSCRIBE SHARES OF THE CO. IN CASE THEY SHORT FALL. SINCE IT IS MANDATORY FOR ALL COS. THAT A MIN. OF 90% SUBS. HAS TO BE SUBSCRIBED. IN CASE IT FALL SHORT CO. HAS TO RETURN ALL THE MONEY TO SUBSCRIBERS, SO AS TO AVOID THIS SITUATION THEY HIRE UNDERWRITERS WHO HELP THEM IN ISSUING SHARES, AS WELL TAKE OVER ANY UNSUBSCRIBED SHARES OF THEIR QUOTA.