Illustration 2.2

Model: Issue of both shares and debentures underwritten by one underwriter

Veer Ltd. issued 5,000 equity shares of 100 each and 5,000 10% debentures of 100 each. The debentures were issued at a discount of 8%. The whole of the issue was underwritten by M/s Durai & Co. for a commission of 2.5% on the issue price of shares and 2.5% on the issue price of debentures. The public applied for 4,500 equity shares and 4,200 debentures. These were immediately paid for. The underwriters fulfilled their obligations.

You are required to prepare journal ledger accounts and show the balance sheet of Veer Ltd.

Solution

Note: Issue of debentures has been discussed in detail in the chapter “Issue and Redemption of Debentures” Students may refer it for clear understanding.

1. For debentures subscribed by the public:

    

   Number of debentures subscribed	=	4,200
   Value	=	4,200 × 100 = 4,20,000
   Discount @ 8%	=	8% on 4,20,000
   	=	33,600
   ∴ Payment received	=	4,20,000 − 33,600
   	=	3,86,400

    

2. Number of debentures not applied for by public:

    

   (5,000 − 4,200)	=	800 debentures
   Value = 800 × 100	=	80,000
   Discount @8%	=	6,400
   ∴ Underwriter’s A/c	=	(80,000 − 6,400) = 73,600

    

3. Commission on debentures:

    

   Issue value of debentures	=	(Face value – Discount)
   	=	( 5,00,000 – 8% on 5,00,000)
   	=	5,00,000 – 40,000
   	=	4,60,000

   

4. For shares, calculation is similar to that of Illustration 2.1.

 

2.8.1.2.1 Complete Underwriting

1. When an entire issue is fully underwritten by a single underwriter:

   In case, if 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 which are not applied for by the public. That means, the underwriter has to pay for such shares or debentures which are not subscribed by public. Under this type of underwriting, computation of underwriting commission is very simple and easy.

2. When an entire issue is fully underwritten by more than one underwriter:

   In case, if an issue is fully subscribed by the public, the underwriters are free from any liability. They are entitled to receive commission on their agreed ratio.

   Otherwise, if the issue is not subscribed fully, then liability of each of the underwriter is determined by using the following format (specimen):

   Statement showing the liability of the underwriters:

Illustration 2.3

Model: Whole issue 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.

Solution

1. Basic calculation:

   Total number of shares issued: 1,00,000

    

   Gross liability ratio	=	A:B:C = 50%:25%:25%
   	=	50:25:25
   	=	2:1:1.

   On this ratio, the number of shares has to be apportioned:

   

2.  

Illustration 2.4

Model: 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:

You are required to find the liability of each underwriter individually.

Solution

 

At times, while apportioning the surplus among others, the result may show that the underwriters who have attired their agreed ratio will have to again shoulder additional liability. In such cases, the surplus has to be again reapportioned to avoid excess liability. This concept can best be explained through the following illustration:

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 Modified]

Solution

 

2.8.1.2.2 Partial Underwriting

(a) When a part of an issue is underwritten by one underwriter:

Under this type, a single underwriter will underwrite a part of the issue—say 65%. The underwriter’s liability is confirmed to 65% of the issue. For the remaining part (100 – 65) 35%, the company itself has to shoulder the responsibility.

In such cases, the underwriter is given credit for all the marked applications whereas the unmarked forms are to be credited to the company.

The liability of the underwriter is determined by using the following form: Statement showing the liability of the underwriter:

Particulars	No. of Shares
Step 1: Total Issue of Shares or Debentures	x
Step 2: Less: The Portion Left out by Underwriter	x
Step 3: Gross Liability of the Underwriter	xx
Step 4: Less: Marked Applications	x
Step 5: Balance	xx
Step 6: Less: (Surplus) Excess Unmarked Application	x
Step 7: Net Liability of the Underwriter	xx

Important note

In case the marked applications exceed the gross liability of the underwriter, he cannot be insisted upon to take shares or debentures. The same will hold good even if there is a shortage of applications towards their part of the issue for which the company is responsible. In other words, the underwriter’s liability is NIL in such a situation.

Illustration 2.6

‘X’ Ltd. issued 50,000 equity shares of 50 each and 75% of the issue was underwritten by Mr. ‘A’. Applications for 40,000 were received in all, out of which applications for 25,000 were marked. Determine the liability of Mr. ‘A’.

Solution

 

Particulars	No. of Shares
	Mr. A	Company
Step 1: Gross Liability (75% of 50,000 Shares to Mr. A)	37,500	12,500
Step 2: Less: Unmarked Applications Credited to the Company (Received – Marked)(40,000 shares – 25,000 shares)	—	15,000
Step 3: Number of Surplus Applications Accruing to the Company – 2,500 Shares—to be Credited to the Underwriter Mr. A.	37,500	(–2,500)
Step 4: Less: Marked Applications (Given)	–2,500	+2,500
	35,000	Nil
	25,000	—
Step 5: Net Liability of the Underwriter Mr. A (Step 3 – Step 4)	10,000	—

II (b) When a part of the issue is underwritten by two or more underwriters:

If two or more underwriters underwrite a part of issue of shares/debentures, then the liability of each of the underwriter is to be determined by using the following form:

 

Illustration 2.7

Model: When a part of issue is underwritten by more than one underwriter.

ABC Ltd. issued 1,00,000 shares of 50 each. These shares were underwritten as under:

M: 50,000 shares; N: 30,000 shares

The public applied for 80,000 shares which included marked applications as follows:

M: 12,000 shares; N: 3,000 shares

You are required to determine the liability of the underwriters

 

[Bharathidasan University Modified]

Solution

1. This is a case of partial underwriting by two underwriters.

    

   Total shares	: 1,00,000
   Less: Underwritten by M and N
   50,000 + 30,000	: 80,000
   ∴ Company’s liability = 20,000 shares

    

2. The surplus applications accruing to the company has to be determined by opening additional column “Company”. This has to be apportioned to M and N in 5:3 ratio.

Illustration 2.8

Poornima Ltd. issued 6,000 debentures of 100 each. The issue was underwritten as follows:

Praveen: 30%; Diraj: 30%; Ansul: 20%

The Company received applications only for 5,000 debentures.

You are required to determine the liability of the underwriters.

Solution

1. This is partial underwriting.
2. The Company has to be considered as an underwriter.

    

   Its liability	=	100% − Total of underwriters’ share
   	=	100% − (30% + 30% + 20%)
   	=	100% − 80% = 20%
   ∴ Number of debentures = 20% of 6,000 debentures

   = 1,200 debentures

2.8.1.2.3 Firm Underwriting

The underwriter has to subscribe for the shares or debentures underwritten “firm”. In case of over subscription, underwriter will get priority over the general public for the shares or debentures underwritten “firm”.

When the underwriting agreement is silent on this, i.e, if nothing is mentioned specific, then “firm underwriting” applications are to be dealt with as follows:

Approach I: All applications are to be treated as “marked applications”. The respective underwriters will be given the entire advantage for shares or debentures “underwritten firm”.

Approach II: The advantage (benefit) of applications for shares or debentures “underwritten firm” is to be apportioned to all underwriters in their gross liability ratio. That is, they will be treated as “unmarked applications”.

Illustration 2.9

Model: Firm underwritings

One underwriter Poonam Ltd. issued 60,000 shares of 100 each. The whole issue was underwritten by Khan. In addition, there is a firm underwriting of 5,000 shares by Khan Applications for 48,000 shares received by the company in all. Determine the liability of Khan.

Approach I: When the entire benefits of applications for shares “underwritten firm” is given to the respective underwriters (Treated as “marked applications”), their liability is to be determined by using the following form.

 

Solution

 

Particulars	No. of Shares
Step 1: Gross Liability	60,000
Step 2: Less: (Marked Applications + Unmarked Applications + Firm Applications) Total Applications Received (Given)	48,000
Step 3: Net Liability (Normal Underwriting Agreement)	12,000
Step 4: Add: “Firm” Underwriting (Given)	5,000
Step 5: Liability of the Underwriter (Khan) (Total)	17,000

Firm underwriting—Two or more underwriters—Full issue

Approach II: When the entire benefit of applications for shares “underwritten firm” are not given to respective underwriters (treated as “unmarked applications”), their liability is to be determined by using the following form:

 

Illustration 2.10

Model: Firm underwriting—Benefit given to underwriter treated as marked applications

M/S Varma Ltd. issued 1,00,000 equity shares of 10 each at par. The entire issue was underwritten as follows:

X: 50,000 shares (Firm underwriting 6,000 shares); Y; 30,000 shares (Firm underwriting 10,000 shares); Z: 20,000 shares (Firm underwriting 4,000 shares)

The total applications including firm underwriting were 80,000 shares. The marked applications were as follows:

X: 25,000 shares; Y: 10,000 shares; Z: 5,000 shares

Determine the liability of each underwriter and the amount of commission payable to them assuming the rate of commission to be 4% on issue price.

Solution

(a) Calculation of commission payable to underwriters:

Note: Maximum rate allowed by law is 5%.

(i) Underwriter X:

Illustration 2.11

Model: Firm underwriting

Approach I: Market applications (Benefit given to underwriters)

Excellent Ltd. made an issue of 1,20,000 equity shares of 10 each which were underwritten as follows:

Ram: 60,000 shares; Rahim: 36,000 shares; Robert: 24,000 shares

In addition, there was “firm” underwriting as follows: Ram: 5,000 shares; Rahim: 2,500 shares; Robert: 6,000 shares.

The total subscriptions including “firm” underwriting were for 90,500 shares.

The following marked applications were included in the subscriptions:

Ram: 15,000 shares; Rahim: 20,000 shares; Robert: 12,000 shares.

Show the liabilities of each underwriter by treating “firm” underwriting applications as ‘marked applications’.

Solution

Note:

• This is “firm” underwriting by two or more partners.
• As there is specific direction, treat like “marked applications”, the first approach, i.e., the advantage (benefit) of firm underwriting, has to be given to individual underwriters.
• First, number of “unmarked applications” will be determined as follows:

Particulars	No. of Shares
Step 1: Total Applications Including “Firm”:	90,500
Step 2: Less: Firm Underwriting Applications:         (Ram—5,000 + Rahim—2,500 + Robert—6,000)	13,500
Step 3: Less: Marked Applications         (Ram—15,000 + Rahim—20,000 + Robert—12,000)	77,000 47,000
Step 4: Unmarked Applications from the Public =	30,000

• In determining the net liability of individual underwrites, “firm underwriting” has to be deducted and in determining the total liability of underwriters, the same “firm underwriting” shares have to be added to net liability to the shareholders.
• Approach I is adopted to determine the liability of underwriters as follows:

Illustration 2.12

Model: Determination of net amount due from underwriters—when the benefit of firm underwriting is given to the individual underwriters.

Kavya Ltd. issued 3,00,000 equity shares of 10 each as 7 per share was payable along with application and balance an allotment. The issue was underwritten equally by P, Q and R for a commission of 3%. Applications for 2,80,000 shares were received as per details below:

It was agreed to credit the unmarked applications equally to P and R. Kavya Ltd. accordingly made the allotment and received the amounts due from the public. The underwriters settled their accounts.

You are required to

1. Prepare a statement showing the liability of the underwriters
2. Determine the net amount due from the underwriter.

(Direction-Adopt Approach I, i.e, the benefit of firm underwriting is given to individual underwriters.)

Solution

(i)

 

Allotment of shares will be as follows:

(ii) Determination of net amount due from underwriters:

Illustration 2.13

Model: Determination of net amount due from underwriters, when the benefit of firm underwriting is not given to individual underwriters.

Figures—Same as in Illustration 2.14

Solution

(i)

 

Allotment of shares:

 

To the public (3,00,000 − 46,000)	=	2,54,000 shares
To P—(Normal liability + Firm)	=	10,000 shares
(Ref: Step 4 + Step 5: 0 + 10,000)
To Q—(8,000 + 10,000)	=	18,000 shares
(Step 4 + Step 5)
To R—(12,000 + 6,000)	=	18,000 shares
(Step 4 + Step 5)
Total	=

(ii) Determination of amount due from underwriters

Illustration 2.14

Model: Firm and partial underwriting one underwriter

Sardar Parel Co. Ltd. issued 50,000 12% preference shares of 100 each. 70% of the issue was underwritten by Yoga. In addition, there is a firm underwriting of 7,500 shares by Yoga. Applications for 45,000 shares were received by the company in all. The marked applications totalled 20,000 shares. Determine the liability of Yoga.

Solution

Calculation of unmarked applications:

 

Total applications received (Subscribed)	=	45,000 shares
Less: Marked applications (Given)	=	20,000 shares
	=	25,000 shares
Less: “Firm” underwriting	=	7,500 shares
Total unmarked applications	=	17,500 shares

 

Particulars	Shares Underwritten by Yoga	Remaining to Company
Step 1: Gross Liability 70% of 50,000 Shares	35,000	15,000
Step 2: Less: Unmarked Applications (Credit Given to Company – Ref: Note)	—	17,500
	35,000	-2,500
Step 3: Less: [Credit Given to Underwriter as it is Treated Like Marked Form] Surplus 2,500 Shares Accruing to the Company.	-2,500	+2,500
	32,500	—
Step 4: Less: Firm Underwriting (Given)	7,500	—
	25,000	—
Step 5: Less: Marked Applications (Given)	20,000	—
Step 6: Net Liability of Yoga	5,000	—
Step 7: Add: Firm Underwriting (Given)	7,500	—
Step 8: Total Liability of Yoga—the Underwriter	12,500	—

Illustration 2.15

Model: Partial and firm underwriting

More than one or two underwriters B, C and D underwrote 75% of an issue of 40,000 6% preference shares of 100 each in the ratio of 5:3:2. The “firm” and “marked” applications of the underwriters are as follows:

 

	Firm	Marked
B	5,000	7,000
C	4,000	6,000
D	1,000	2,000

Applications for 30,000 shares were received in all. You are required to prepare a statement of liability of each underwriter treating firm underwriting applications like unmarked forms.

Solution

Basic calculations:

1. Ascertainment of gross liability of underwriters:

    

   Total number of shares issued	= 40,000
   Number of shares underwritten	= 75% of 40,000 shares
   	= 30,000 shares
   Ratio of underwriting	= 5:3:2
   Hence, gross liability of B
   Gross liability of C
   Gross liability of D

2. Calculation of unmarked applications:

    

   Total applications received	= 30,000
   Less: Marked applications
   (B—7,000 + C—6,000 + D—2,000)	= 15,000
   ∴ Unmarked applications	= 15,000

[Advanced Level for Professional Course Students]

Illustration 2.16

Model: Comprehensive

The following underwriting takes place:

X: 18,000 shares; Y: 7,500 shares; Z: 4,500 shares.

In addition, there is firm underwriting:

X; 2,400 shares; Y: 900 shares; Z: 3,000 shares

The share issue is 30,000—Total subscription including firm underwriting was 21,300 shares and the forms included the following marked forms:

X: 3,000 shares; Y: 6,000 shares; Z: 1,500 shares

You are required to show the allocation of liability of the underwriters.

 

[C.A. (Final). Modified]

Solution

Approach I: When shares underwritten “firm” are treated as marked applications, i.e., the entire benefits of applications for shares underwritten firm is given to respective Underwriters.

STAGE I: Calculation of unmarked applications:

Tabulate the figures as follows:

Total subscription	=	21,300 shares
*Less: (Marked forms + Firm underwriting shares for all the three x + y + z underwriters)	=	16,800 shares
∴Unmarked applications	=	4,500 shares

STAGE II: Liability of underwriter is determined as follows by preparing a statement showing liability of the underwriters:

 

Approach II: When shares underwritten firm are treated as “unmarked applications”.

 

Illustration 2.17

Sunlight Ltd. invited applications from public for 50,000 equity shares of 50 each at a premium of 10 per share. The entire issue was underwritten by underwriters W, X, Y and Z to the extent of 30%, 30%, 20% and 20%, respectively with the provision of firm underwriting of 1,500, 1,000, 500 and 500 shares, respectively.

The underwriters were entitled to the maximum commission permitted by law.

The Company received applications for 35,000 shares from public out of which applications for 9,500, 5,000, 10,500 and 4,000 shares were marked in favour of W, X, Y and Z, respectively.

Calculate the liability of each one of the underwriters. Also ascertain the underwriting commission payable to different underwriters.

 

[C.S. (Inter). Modified]

Solution

Approach I: When the shares underwritten firm are treated as “marked applications”.

 

Approach II: When shares underwritten firm are treated as “unmarked applications”.

Note:

Calculation of unmarked application:

 

Applications received for subscription	=	35,000 shares
Add: Shares underwritten firm	=	3,500 shares
Total applications	=	38,500 shares
Less: Marked applications	=	29,000 shares
∴Unmarked applications	=	9,500 shares

 

Calculation of Underwriting Commission:

(b) Preparation of ledger accounts

(i)

 

(ii)

 

Illustration 2.18

PVR Ltd. issued 80,000 equity shares of 10 each and 80,000 10% debentures of 10 each, the debentures were issued at a discount of 10%. The whole of issue was underwritten by M/s. Vamanan & Co. for a commission as per the legal limit in force now, on the issue price of shares and debentures. The public applied for 75,000 shares and 70,000 debentures. They were immediately paid for. The underwriters fulfilled their obligations.

You are required to

1. Pass journal entries
2. Prepare ledger accounts
3. Construct the balance sheet of PVR Ltd.

Solution

(a)

 

(b)

 

(c)

Construction of balance sheet:

 

Underwriting of shares and debentures: Underwriting is a contract entered into by a company with persons or institutions who undertake to take up shares or debentures which may not be subscribed for by the public. The consideration for underwriting is “underwriting commission”.

Payment of the commission is regulated by legal provisions, which is 2.5% of the issue price of shares, now.

Types of underwriting:

1. Pure underwriting: Under this type, the underwriter’s liability is purely contingent. The underwriter agrees to subscribe for the shares or debentures of the company which are not applied for by the public.

   Pure underwriting may further be classified into: (i) complete underwriting and (b) partial underwriting. In case of complete underwriting, the whole of the issue of shares or debentures of a company is underwritten without any firm underwriting. In case of a partial underwriting, only a portion of the issue of shares or debentures is underwritten whereas for the remaining portion, the company is to be treated as “underwriter”.

2. Firm underwriting: Under this type, the underwriter’s liability is partly contingent and partly definite. The underwriter has to take (i) the number of shares he has applied firm and (ii) the number of shares he is obliged to take up as per terms of the underwriting agreement.

   Marked applications: These are applications received from public bearing the stamp or making of a particular underwriter. If the applications do not bear any stamp or marking, they are called unmarked or direct applications.

   Firm under writing applications: The underwriters will agree to take up a specified number of shares “firm” apart from the shares underwritten. This is an additional liability for the underwriters.

   Determination of liability of the underwriters, commission on underwriting, preparation of journal, ledger accounts and the balance sheet are all discussed in various illustrations (Ref: illustrations 2.1 to 2.20)

Underwriting: A contract entered into by a company with persons or institutions to facilitate the task of subscription of shares or debentures by the public.

Underwriter: Persons or institutions who enter into contract of underwriting with the company.

Underwriting Commission: Remuneration for services rendered by underwriters in discharging the obligation of underwriting.

Pure Underwriting: A type of contract in which the underwriter agrees to subscribe for shares or debentures of the company which are not applied for by the public.

Firm Underwriting: A type of underwriting contract in which the underwriters of an issue agree to take up a specified number of shares “firm” in addition to the shares underwritten.

Marked Applications: Applications forms for shares or debentures issued to public for subscription bearing the name of the underwriters.

QUESTION BANK

I: State whether the following statements are true or false

1. Underwriting is only an adjustment, which cannot be enforceable by law.
2. The underwriters can take up a portion or whole issue made for public subscription.
3. The underwriting commission is payable on the shares to be taken up by the underwriters
4. Payment of the commission is to be authorized by the Articles of Association of the Company.
5. Underwriting commission is payable on shares taken by the promoters, directors.
6. Underwriters may be asked to agree for less commission than prescribed by the statutory provisions.
7. Sub-underwriters are appointed by the company only.
8. In case of partial underwriting, the company is also treated as underwriter for the remaining part of the issue.
9. The application form issued by the company directly to the public bear marking or stamp.
10. In case of firm underwriting, the underwriters agree to take up a specified number of shares “firm” in addition to the shares undertaken as per contract.
11. Unmarked applications can be distributed among the underwriters in the ratio of gross liability.
12. When shares or debentures are allotted to the underwriters, the underwriter’s account is credited.

Answers:

1. False
2. True
3. False
4. True
5. False
6. True
7. False
8. True
9. False
10. True
11. True
12. False

II: Fill in the blanks with apt word(s)

1. Underwriting is a contract between the who may be persons or company and the_____institutions.
2. The prime motive underlying underwriting is to protect the company against the danger of not receiving_____.
3. The consideration for the service rendered by the underwriters is_____.
4. The payment of commission is as per Section_____ of the Companies Act.
5. The commission is payable on shares or debentures offered to the_____ only.
6. According to the guidelines issued by the SEBI, the maximum commission on shares is_____.
7. Underwriters may reduce their risk by entering an agreement with another person is called as_____.
8. Companies may appoint one or more agencies as_____ to the issue, who take charge from planning till the completion of all formalities to an issue.
9. Underwriting agreements may broadly be divided into two types: (i)_____ and (ii)_____.
10. Under pure underwriting, the underwriter’s liability is purely_____.
11. Under firm underwriting, the underwriter’s liability is partly_____ and partly_____.
12. The marked applications facilitate the task of determining the_____ of each underwriter.
13. Marked applications are also known as_____.
14. When commission is payable to the underwriters,_____ A/c is to be credited.
15. When the net amount due from the underwriters on the shares taken by them is received, _____A/c is to be debited.

Answers:

1. underwriters
2. minimum subscription
3. underwriting commission
4. 76
5. public
6. 2.5%
7. sub-underwriter
8. manager
9. pure; firm
10. contingent
11. definite; contingent
12. liability
13. direct applications
14. underwriter’s A/c
15. bank A/c

III: Multiple choice questions—Choose the correct answer

1. Under complete underwriting type of contract, the liability of the single underwriter shall be
   1. number of shares underwritten – number of shares applied for by the public
   2. number of shares underwritten
   3. number of shares applied for by the public
   4. none of these
2. The underwriter is entitled to receive remuneration on
   1. the nominal value of shares actually purchased
   2. the issue price of shares underwritten
   3. the number of shares applied for by the public
   4. none of these
3. When an underwriter agrees to take up a definite number of shares in addition to underwritten shares, it is called
   1. complete underwriting
   2. partial underwriting
   3. firm underwriting
   4. none of these
4. As per Section 76 of the Company’s Act, commission payable to an underwriter should not exceed
   1. 0.5%
   2. 2.5%
   3. 6%
   4. 5%
5. As per the guidelines issued by SEBI, the commission payable to an underwriter is
   1. 2.5%
   2. 5%
   3. 6%
   4. 10%
6. The aggregate amount payable as fees to managers for issues up to 5 crore is
   1. 0.2%
   2. 2%
   3. 0.5%
   4. 2.5%
7. A company issued 10,000 equity shares, which were underwritten exclusively by Mr. Felix. The company received applications for 15,000 shares. Mr. Felix is entitled to receive commission on
   1. 15,000 shares
   2. 5,000 shares
   3. 10,000 shares
   4. none of these
8. Rose Ltd. issued 10,000 shares of 10 at a discount of 1 per share. The underwriting commission will be paid on
   1. 1,00,000
   2. 1,10,000
   3. 90,000
   4. none of these

Answers:

 

1. (a)	2. (b)	3. (c)	4. (d)
5. (a)	6. (b)	7. (c)	8. (c)

1. Define “underwriting”.
2. What is the prime underlying purpose of “underwriting” of shares and debentures of a company?
3. Explain the provisions of Section 69 (1) of the Companies Act.
4. What do you mean by “underwriting commission”?
5. Who are “underwriters”?
6. Write a short note on the activities of a “broker”?
7. Write a short note on the role of “managers to the issue”.
8. Name the main types of underwriting?
9. Explain: Firm underwriting.
10. What do you understand by the term “marked applications”?
11. What is meant by “direct applications”?
12. Explain the “Abatement Clause” with respect to shares taken “firm”.
13. Explain: Gross liability ratio.
14. Name the approaches for dealing with “firm underwriting applications”?
15. What is the main difference between marked and unmarked applications in accounting treatment?

1. Explain the various legal provisions for payment of underwriting commission.
2. Explain the various types of underwriting agreement.
3. How will you determine the liability of underwriters when
   1. an entire issue is fully underwritten by a single underwriter and
   2. entire issue is underwritten by two or more underwriters.
4. How will you determine the liability of the underwritten
   1. when a part of the issue is underwritten by only one underwriter and
   2. when a part of issue is underwritten by two or more underwriters.
5. Explain the two approaches of dealing with “firm underwriting” applications.

 

[Model: Complete underwriting—Entire issue underwritten by one underwriter]

1. X Ltd. issued 50,000 equity shares of 100 each at par. The whole issue was underwritten by Good Securities & Co. for a commission of 2%. The company received applications only for 25,000 shares. All the applications were accepted. Give journal entries, assuming that all amounts due have been received.

[Ans: Net liability of the underwriter: 25,00,000; Commission: 1,00,000]

[Model: Complete underwriting—Entire issue underwritten by one underwriter]

2. A company issued 80,000 equity shares of 100 each at par and 4,000 debentures of 1,000 each at 950. The whole of the issue has been underwritten by Venu & Co. The whole of the shares are applied for but applications for 3,200 debentures only were received. All the applications were accepted. Commission payable to the underwriter is the maximum amount permissible legally.

Give journal entries to record the above transactions and prepare the balance sheet at this stage, assuming that all amounts due have been received.

[Ans: Underwriting commission (at 2.5%) on shares: 2,00,000; Underwriting commission on debentures (at 2%): 45,600; Underwriter’s liability: 7,60,000; Balance sheet total: 1,20,00,000]

[Model: Whole issue is underwritten by two or more underwriters]

3. X Ltd. issued 3,00,000 equity shares. The whole of the issue was underwritten by P: 40%; Q: 30% and R: 30%. Applications for 2,40,000 shares were received in all, out of which applications for 60,000 shares had the stamp of P, those for 30,000 shares that of Q and 60,000 shares that of R. The remaining applications for 90,000 shares did not bear any stamp.

You are required to show the net liability of the underwriters.

[Ans: Net liability of P: 24, 000 shares; Q: 33,000 shares; R: 3,000 shares]

4. XYZ Ltd., which was incorporated on 1 September 2010, issued applications for 2,50,000 equity shares of 100 each. The entire issue was fully underwritten by P, Q, R and S as P; 1,00,000 shares; Q: 75,000 shares; R: 50,000 shares and S: 25,000 shares.

Applications were received for 2,25,000 shares of which marked applications were as follows: P: 1,10,000 shares; Q; 45,000 shares; R: 55,000 shares and S: 5,000 shares.

You are required to calculate the net liability of individual underwriters, by giving credit to unmarked applications in the ratio of gross liability.

[Ans: Q: 11,250 shares; S: 13,750 shares]

5. R.M.S. Ltd. was formed with a capital of 10,00,000 in 10 shares, being issued to the public. The underwriting of these shares was as follows:

A: 35,000 shares; B: 30,000 shares; C: 20,000 shares; D: 10,000 shares; E: 3,000 shares F; 2,000 shares.

All marked applications were to go in relief of the underwriters, whose names they bear. The applications marked by the underwriters were as:

A: 10,000 shares; B: 22,500 shares; C: 20,000 shares; D: 7,500 shares; E: 5,000 shares and F: Nil. Applications for 20,000 shares were received on unmarked forms.

Draw up a statement showing the number of shares each underwriter had to take up.

[Ans: A: 13,650 shares and F: 1,350 shares] [Model: Partial underwriting—by one underwriter]

6. Y Ltd. issued 1,00,000 equity shares of 10 each at a premium of 10% and 4,000 debentures of 100 each at 95. 80% of the issue is underwritten by Patel & Co. at the maximum rate of commission allowed by law. Applications were received for 80,000 equity shares and 3,000 debentures which were accepted and payments for these were received in full.

You are required to journalise the above transactions and show the entries in the balance sheet assuming that the amount due from the underwriter has been received.

[Ans: Commission an shares: 22,000; Commission on debentures: 5,320; Cash received from underwriter: 2,24,680; Balance sheet total: 14,36,000]

[Model: Partial underwriting—by more than one underwriter]

7. Rising Sun Ltd. issued 1,00,000 equity shares of 50 each. The issue was underwritten by underwriters as follows: X: 30%; Y: 30%; Z: 20%

However, the company received applications for 80,000 shares only.

You are required to determine the liability of the respective underwriters and write the journal entries in the books of the company.

[Ans: X takes 6,000 shares; Y takes 6,000 shares; Z takes 4,000 shares]

8. A company issued 1,00,000 shares of 50 each for public subscription. The issue was underwritten as follows:

A: 25%; B; 30%; C:25%

The company received a total number of 70,000 applications of which marked applications were as follows:

A: 20,000 shares; B: 15,000 shares and C: 20,000 shares. Determine the liability of each of the underwriters

[Ans: A: 5,000 shares; B: 15,000 shares; C: 5,000 shares]

[Model: Firm underwriting]

9. The following underwriting took place:

X: 1,00,000 shares; Y: 60,000 shares; Z: 40,000 shares

In addition, there was firm underwriting as:
X: 20,000 shares; Y: 10,000 shares; Z: 30,000 shares

The share issue was for 2,00,000 shares. Total subscriptions including firm underwriting was 1,70,000 shares and the forms included the following marked forms:
X: 40,000 shares; Y: 20,000 shares; Z: 20,000 shares show the allocation of liability of the underwriters.

[Ans: Total liability   X   Y   Z

(including firm):

1. Firm treated as marked (Approach I):     35,000 25,000 30,000
2. Firm treated as unmarked (Approach II):     35,000 23,000 32,000]

10. Surya Co. Ltd. has an authorized capital of 25,00,000 divided into 25,000 equity shares of 100 each. The company issued for subscription of 12,500 shares at a premium of 20 each. The entire issue was underwritten as:

A:7,500 shares (Firm underwriting 1,250 shares);

B:3,750 shares (Firm underwriting 500 shares);

C:1,250 shares (Firm underwriting 250 shares).

Out of the total issue, 11,250 shares including firm underwriting were subscribed. The following were the marked forms:

A: 4,000 shares; B: 2,500 shares and C: 1,000 shares.

Calculate the liability of each underwriter.

(Rounded off)]

11. Chandra Ltd. issued 2,00,000 equity shares of 20 each at par. The entire issue was underwritten as follows:

P: 1,20,000 shares (Firm underwriting 16,000 shares);

Q: 50,000 shares (Firm underwriting 20,000 shares);

R: 30,000 shares (Firm underwriting 6,000 shares).

The total applications including firm underwriting were for 1,42,000 shares. The marked applications were as follows:

P: 36,000 shares; Q: 45,000 shares and R: 16,000 shares.

The underwriting contract provides that credit for unmarked applications be given to the underwriters in proportion to the shares underwritten.

Determine the liability of each underwriter.

[Ans: Final liability to   P    Q    R underwriters:

1. Firm treated as  69,600  20,000  10,400 marked:
2. Firm treated as  68,000  20,000  12,000] unmarked:

12. The following underwriting takes place:

X: 30,000 shares; Y: 12,500 shares; Z: 7,500 shares

In addition, there is firm underwriting as follows:

X: 4,000 shares; Y: 1,500 shares; Z: 5,000 shares The issue is for 50,000 shares. Total subscriptions including firm underwriting is for 35,500 shares and the applications include the following marked forms:

X: 5,000 shares; Y: 10,000 shares; Z: 2,500 shares

Show the allocation of liability of the underwriters if the firm underwritten shares are treated as unmarked applications:

[Ans: X: 16,600; Y: 1,500; Z: 6,900 shares]
[Model: Partial and firm underwriting]

13. Ansul & Co Ltd. issued 4,00,000 shares which were underwritten as follows:

A:40%;B:30%;C:20%

The underwriters made firm underwriting as follows:

A:30,000 shares;B:20,000 shares;C:50,000 shares

The total subscriptions excluding firm underwriting, but including marked applications were for 2,00,000 shares.

The marked applications were as follows:

A: 80,000; B: 50,000 shares; C: 20,000 shares.

You are required to prepare a statement showing the liability of the underwriters.

[Ans: Liability of the     A     B     C underwriters

1. Firm applications 75,556  66,668  57,776 treated as marked:
2. Firm application 61,112  53,332  85,556 treated as unmarked:

14. V, R and S underwrote 80% of an issue of4,00,000 preference shares of 10 each in the ratio of 2:2:1. The “Firm” & “Marked” applications of the underwriters are as follows:

 

	Marked	Firm
V	80,000	48,000
R	60,000	40,000
S	20,000	32,000

Applications for 3,20,000 shares were received in all. Prepare a statement showing the liability of each of the underwriters.

[Ans: V: 64,000; R: 76,000; S: 60,000 shares]

 

 

15. PVR Ltd. issued 32,000 equity shares of 100 each and 32,000 and 10% debentures of 100 each, issued at a discount of 6%. The whole of issue was underwritten by Safe & Secure Ltd. for a commission of 2.5% on issue price of shares and 2.5% on the issue price of debentures. The public applied for 28,800 shares and 25,600 debentures. These were immediately paid for. The underwriters fulfilled their obligations.

You are required to

1. Prepare journal entries
2. Prepare ledger accounts
3. Draw the balance sheet.

[Ans: Underwriting commission on shares: 80,000; Underwriting commission on debentures: 75,200; Balance sheet total: 64,00,000].

16. Five Stars Ltd. comes out with a public issue of share capital on 1 April 2011 of 1,00,000 equity shares of 100 each at a premium of 5%. 25 is payable on application (on or before 30 April 2011) and 30 on allotment (30 June 2011) including premium. The issue is underwritten by two underwriters—Vijay and Ajay—the commission being 5% of the issue price. Each of the underwriters underwrites 2,000 shares firm. Subscriptions totalled 96,000 shares, the distribution of forms being:

Vijay: 52,000 shares; Ajay: 36,000 and unmarked forms 8,000.

One of the allotees (using forms marked with the name of Vijay) for 200 shares failed to pay the amount due on allotment, all other moneys due being received in all including any due from the shares devolving upon the underwriters. The commission due is paid as per agreement. The shares of different allottees are finally forfeited on 30 September 2001 and re-allotted for payment in cash of 40 per share.

You are required to pass summary journal entries to record the above events and transactions including cash.

17. Rajan & Co. Ltd. issued 50,000 shares of 100 each at a premium of 20% ( 20 per share). The entire issue was underwritten as follows:

X: 25,000 shares (Firm underwriting 5,000 shares);

Y: 15,000 shares (Firm underwriting 2,500 shares);

Z: 10,000 shares (Firm underwriting 2,500 shares).

Shares applied for were 45,000 shares, the following being the marked forms:

X: 17,500 shares including firm underwriting;

Y: 7,000 shares including firm underwriting;

Z: 8,000 shares including firm underwriting.

What is the liability of each underwriter and how much commission will each get, assuming it is the maximum allowed by law?

 

[Ans: Total liability	X: 5,935 shares;
	Y: 6,565 shares;
	Z: 2,500 shares]

 

18. M/s Reddy Ltd. has authorized capital of 50,00,000 divided into 1,00,000 equity shares of $4 50 each. The company issued for subscription 25,000 shares at a premium of 5 each. The entire issue was underwritten as follows:

Amar: 15,000 shares (Firm underwriting 2,500 shares)

Akbar: 7,500 shares (Firm underwriting 1,000 shares)

Antony: 2,500 shares (Firm underwriting 500 shares)

Out of total issue, 22,500 shares including firm underwriting were subscribed.

The following were the marked forms:

Amar: 8,000 shares

Akbar: 5,000 shares

Antony: 2,000 shares

Determine the liability of each underwriter.

 

[C.S. Modified]

19. Global (Indian) Ltd. Issued 4,00,000 equity shares which were underwritten as follows:

 

Underwriter	Shares underwritten
X Ltd.	2,40,000
Y Ltd.	1,00,000
Z Ltd.	60,000

 

The above-mentioned underwriters made application for firm underwriting as follows:

 

X Ltd.	32,000 shares
Y Ltd.	40,000 shares
Z Ltd.	12,000 shares

 

The total applications excluding firm underwriting but including marked applications were for 2,00,000 shares. The marked applications were as under:

 

X Ltd.	40,000 shares
Y Ltd.	50,000 shares
Z Ltd.	20,000 shares

The underwriting contracts provide that underwriters be given credit for firm applications and that credit for unmarked applications be given in proportion to the shares underwritten. You are required to show the allocation of liability.

 

[C.A. (Inter). Modified]

 

[Ans: Total liability	X Ltd.: 1,36,000 shares;
	Y Ltd.: 40,000 shares;
	Z Ltd.: 24,000 shares]

20. Himalaya Mount Ltd. issued 3,60,000 shares which were underwritten as:

A: 2,16,000 shares;

B: 90,000 shares;

C; 54,000 shares

The underwriters made applications for firm underwriting as follows:

A: 28,800 shares;

B: 10,800 shares;

C: 36,000 shares the total subscription excluding firm underwriting (including marked applications) were 1,80,000 shares.

The marked applications were:

A: 36,000 shares;

B: 72,000 shares;

C: 18,000 shares.

You are required to prepare a statement showing the net liability of underwriters.

 

[C.S. (Inter). Modified]

 

[Ans: Total liability	A:1,19,520 shares;
	B:10,800 shares;
	C:49,680 shares]