Underwriting of shares

Basics of underwriting and practice illustrations 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.