FINAL Underwriting of Shares and Debentures.pdf

Underwriting of Shares and Debentures Underwriting Underwriting is the process through which an underwriter (usually a financial institution or investment bank) agrees to purchase any unsold shares or debentures from a company issuing new securities. This guarantees that t...

Underwriting of Shares and Debentures Underwriting Underwriting is the process through which an underwriter (usually a financial institution or investment bank) agrees to purchase any unsold shares or debentures from a company issuing new securities. This guarantees that the company will raise the desired amount of capital, even if not all securities are sold to the public. Underwriting Commission Advantages for Issuers 1. Guaranteed Capital Raising: ○ Meaning: Underwriting ensures the issuer will receive the intended capital regardless of market conditions. 2. Risk Mitigation: ○ Meaning: Underwriters absorb the risk of unsold securities, protecting the issuer from market volatility. 3. Expertise and Guidance:  ○ Meaning: Underwriters provide valuable market insights and ensure regulatory compliance, aiding in a smoother offering process. 4. Enhanced Credibility: ○ Meaning: Associating with reputable underwriters boosts the issuer’s credibility and attracts investors. Advantages for Investors 1. Access to New Issues: ○ Meaning: Investors gain early access to new investment opportunities through underwritten offerings. 2. Price Support: ○ Meaning: Underwriters may stabilize the security’s price post-issue, reducing price volatility for investors. 3. Due Diligence: ○ Meaning: Underwriters perform thorough vetting of issuers, providing investors with reliable information. 4. Informed Investment Decisions: ○ Meaning: Detailed prospectuses and financial disclosures from underwriters help investors make informed decisions. Advantages for Underwriters 1. Fee Income: ○ Meaning: Underwriters earn fees from underwriting spreads, management fees, and selling concessions. 2. Reputation and Market Position: ○ Meaning: Successful underwriting enhances the underwriter’s market reputation and attracts more business. 3. Strategic Opportunities: ○ Meaning: Underwriting builds relationships with issuers and opens doors to additional business opportunities. 4. Market Influence: ○ Meaning: Underwriters influence market pricing and stability, enhancing their role in financial markets. Marked Application Bear the stamp of an underwriter Benefit is given to particular underwriter in whose favor applications have been marked Unmarked Application Do not Bear the stamp of an underwriter Unmarked applications are received directly from the public. Benefit is given first to the company to the extent the issue is not underwritten by underwriters in case of partial undertaking. If there is surplus, then benefit of such unmarked applications is given to the underwriters. Types of Underwriting Normal Underwriting Definition: In normal underwriting, also commonly referred to as "best efforts" underwriting, the underwriter agrees to use their best efforts to sell as many of the securities as possible but does not guarantee the entire issue will be sold. The issuer receives proceeds from only the securities that are actually sold. Key Points: No Guarantee: The underwriter does not guarantee that all the securities will be sold. Risk: The issuer assumes the risk of any unsold securities. Fee Structure: The underwriter typically earns a commission based on the amount of securities sold. Firm Underwriting Definition: In firm underwriting (also known as "firm commitment" underwriting), the underwriter buys the entire issue of securities from the issuer at a set price and then resells them to the public. The underwriter assumes the risk of selling the securities and is guaranteed to receive the proceeds regardless of how many securities are eventually sold to investors. Key Points: Guaranteed Sale: The underwriter buys the full issue from the issuer, providing certainty that the issuer will receive the full amount of capital. Risk: The underwriter assumes the risk of selling the securities; if they can't sell all of them, they bear the loss. Fee Structure: The underwriter earns a spread or commission based on the difference between the purchase price and the selling price. In the books of Companies.. lllustratlon 6 : (Full~ Surplus I, Unm·arked In Balance R~tl~).. A public limited company, wit~ ii. capital of,. ·1·0,00,000 divided· into Equity shares of·, 10· each,· places its entire issue on the market, and the whole issue has been underwritten as ~ollows :.. Paterson & Co. ~ 30,000 shares Price & Co. , 15,000 shares _ Singh & Co.. 35,000 shares.. Co. Talukdar· & 2,000 shares Mazumdar & Co. 10,000 shares. Bane.rjee & co~. _8,000 share~ All marked forms are to go in relief of the· liability of'the underwrit~r whose name they bear... : The applications received on the forms ·marked by the underwriters are : , Paterson·&. Co. 25,000 shares·· ' ·.·Price & Co;··. -. 1,000 shares Singh & Co. 23,500 shares. Talukdar & Co. -~ ~ 2,000 shares Mazumdar & Co. 6,500 shares.. > Banerjee &-Co~. 7,000 shares.. Applications for 20,000 Equity shares ·are received.on unmarked application forms:...,.Calculate the· liability of the individual underwriters. In terms of the underwriting agree~ent, the relevant proportion is to be asc~rtained not in terms of the -origin~I liability ratio but after giving. credit for marked forms..- ' , _ , ·,. -·.(CA-Inter, May 1975,· adapted) /........ lllustratlon·t: (Full, Surplus of 2 Und rwrltera Adjusted) M Limited brought out a public issue of 1 lac equity shares of , 1O each~ Tt,e -entire issue was underwritten by five underwriters as follows : A ~ 25 per cent; B - 15 per cent; C - 1O per cent; D -·30 per cent; and E - 20 per cent. Applications bearing t.he seal of an underwriter are to be applied, in relief of liability. The following applications were received : 13,750 shares bearing the seal of A; 10,250 shares bearing the seal of B; 9,250 share~ bearing the seal of C; 8,25~ shares bearing the seal o( D; and 8,500.shares bearing the seal of E_. ·30,000 shares had no seal of underwriters. Fi~d ' the liability of individual underwriters. Unmarked applications are to be distributed amongst the underwriters in the ratio of their gro~ liability~ ~nlutlon ~  Illustration 8 : (Partial, Surplus of 1 UnderwriterAdjusted) Excel Limited issued 40,000 shares off 10 each~ These shares were underwritten as follows :·A - 20,000 shares; and B - 12:000 shares. The public ~pplied for 33,000 shares-"Yhich inclµded marked applications from the underwriters as follows: A.. 5,000 shares; 8- 3,000 shares. Direct applications received by the Company were for 5,000 shares. Determine the net liability ot the underwriters. Unmarked applications are to be distributed amo_ngst the underwriters· in the ratio of_.fheir gross liability.  7.2 FIRM UNDERWRITING A. Solo Illustration 9 : (Partial Un~eiwritlng) J _. K Limited issued 50,000, 9% preference shares off 1.0 each. 75. per cent of the issue wa$ underwritten by M. In addition, there is a firm ·underwr.iting of 5.,000 ~ha~es from M. In all, the company received applications for 42,000 shares. 30,000 share application·s. had::the seal of Mr. M. Determine the· liability of Mr. M. Firm underwriting applicatio·ns to be treated like mark~ applications. Ascertain.the respective liabilities of the underwrit~r aod the company.. _·  B. · ·Joint 111ustratlon 10: (Full, Benefit - No, S~rp ~ of 1.Underwrlter). ABC Ltd. came up with public.issue of 3,00,000 equity shares of,.10 each at~ 15. per share. P, a·.. and R took underwriting of the isslle in ratio of 3 : 2 : 1 with the pro\Jisions of firm ~nderwriting of 20,000, 14,000 and 10,000 shares respectively. Applications were received'for 2,40,000 shares excluding firm underwriting. The marked,applications · from public were received as under.:. P - 60,000; a -·so,ooo; R - 60,000.. Compute the liability of eacti underwriter as regards the number. of shares to be taken' up assuming that the benefit of firm underwtiting is not given to individual underwriters..  lllustratl9n 11 : (Partl,-I Underwriter, Benefit - ~o) A, B and_ C underwrote 60 per cent of an issue of 1,00,000 pref~rence shares of t 10 each in the ratio of 3: 2 : 1. The firm and marked application of the·underwriters were as follows:· Underwriters Firm Marked A 10,000. 22,000 B 8,000 18,000. C 6,000 10,000 , In all, app_lications for 80,000 shares were received. Prepare the statement s~owing the li~ility of each underwriter. (Firm underwritin g applications are to be_.treat~d as unmarked applications.)  Illustration 14 : (Full, s·urplus of 2 Underwriters adjusted) Authorised capital 6f Jalaram Ltd. was -12,59,000 Equity shares off 10 each. Company issued 80% shares at a premium of f 2 per sh~re which was e~tirely underwritten as follows : Kolak - 40% , Thakkar - 20%. Kotecha - 30% ·Ganatra - 10%..Company received applications for 9,00,000 ~quity Shares including marked applications as below:. Kotak 2,85,0.00 shares·. ~ Kotecha 3,00,000 shares Thakkar 1, 10, 000 shares· Ganatra 1,05,000 $hares.. Underwriters are entitled to get So/o commission on face value. From·the above information find out.the liability ofunderwriters and give jouma_l entries in the books of Jalaram Ltd. (TYBAF, Nov.- ~016~ adapted)  Illust ratio n 17 : (Full ; Benefit - Yes).. Libra Ltd. came up with an issue of 20,00,000 equity shares of, 10 each at par. 5,00; 000.shares were issued.Jo be promoters and the balance offered 10 the public was underwritt en by three underwriters - Anand, Vijay and Ashok - equally, with firm underwriting of 50,000 shares ea~. Subsc_riptions total1ed 12,97,000 shares·(excluding firm underwriting) ~ut including the which were : marked form ~ ' Anand - 4,25,000 shares; Vijay - 4,50,000 shares; Ashok.- 3,50,000 shares. ' The underwriters had applied for number of ·shares covered by firm underwriting. The amounts payaf;>le· on ~p_lications and· allotment were f 2.50 and , 2 respectively. The agree d commission was 2.5%.. Pass summ ary Journ al entri es for : (a) The allotment ofshares to the underwriters;. (b) The commission due to each of them; and (c) The net cash paid and/or received.