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UNDERWRITING OF SHARES AND DEBENTURES. - PowerPoint PPT Presentation

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UNDERWRITING OF SHARES AND DEBENTURES.

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    1. UNDERWRITING OF SHARES AND DEBENTURES.

    2. MEANING OF UNERWRITING. Underwriting means undertaking a responsibility or giving a guarantee that the shares or debentures offered to the public will be subscribed for in full. The persons or institutions that give such guarantee are called underwriters. For this service underwriters charge a commission which is generally calculated at a specified rate on the issue price of the whole of the shares or debentures underwritten.

    3. CONTINUE.... Thus in case the shares and debentures are not taken up by the public wholly, the underwriters will have to take up the balance of shares or debentures not subscribed for by the public and to pay for them. Generally, an issue of shares or debentures of the company is underwritten by two or more firms jointly. In India the business of underwriting is carried on by some specialised institution, some of them are :- Industrial development bank of India (IDBI) Unit trust of India (UTI) Life insurance corporation of India (LIC) Industrial finance corporation of India (IFCI) Nationalised banks

    4. TYPES OF UNDERWRITING: Underwriting are of three types :- *Full underwriting *Partial underwriting *Firm underwriting

    5. 1. Full underwriting If the underwriters underwrite the whole of the issue of shares or debentures of a company, it is called full underwriting. Example :- Suppose X ltd issues 1,00,000 equity shares of Rs. 10 each at par. The whole of the issue is underwritten by IDBI. This is the case of full underwriting.

    6. 2. Partial underwriting. If the underwriters underwrite only a part of the issue of shares or debentures of the company, it is called partial underwriting. For example :- Suppose X Ltd issues 1,00,000 equity shares of rs. 10 each at par. 80% of the issue is underwritten by idbi. This is the case of partial underwriting.

    7. 3. Firm underwriting. If the underwriters make a definite commitment to take up a specified number of shares or debentures irrespective of the results of the public response to the issue, it is called Firm underwriting. Suppose X Ltd issues 1,00,000 equity shares of rs. 10 each at par. 80% of the issue is underwritten by the idbi with the definite commitment to take up 10,000 shares. This is the case of firm underwriting.

    8. Advantages. Guarantee of full subscription: The main advantage of underwriting is that the underwriters give a guarantee that the shares offered to the public will be subscribe for in full. Thus in case of poor public response, the underwriters will take up the balance of shares not subscribed for the public and pay for them. Boost up the confidence of investors: Underwriting of shares boost up the confidence of the investors. They generally feel that the underwriters underwrite the shares of only good companies. Expert financial advise: In addition to underwriting of shares, the company also gets the expert financial advise of underwriters as to where, when and how the shares are to be sold. Wide coverage: Underwriters possess a specialised knowledge of the share market. They help the company in the dispersal of shares to public over a wide area.

    9. Provisions regarding the payment of underwriting commission. The consideration payable to underwriters for underwriting the issue of shares or debentures of a company is called underwriting commission. It may be paid in cash or in fully paid shares or debentures. Underwriting commission is generally calculated at a specified rate on the issue price of the whole of the shares or debentures underwritten. Section 76 of companies act lays down certain conditions relating to the payment of underwriting commission which must be complied with. These are : 1)The payment of commission must be authorised by the articles of association.

    10. 2) The commission paid or agreed to paid must not exceed : * In case of shares:- 5% of the issue price of the shares or the rate authorised by the articles whichever is less. *In case of debentures:- 2.5% of the issue price of the shares or the rate authorised by the articles whichever is less. 3) The amount or rate of commission should be disclosed in the prospectus or statement in lieu of prospectus as the case may be or in the statement filed with the registrar before the payment of the commission. 4) The number of shares or debentures which persons have agreed to subscribe absolutely or conditionally should be disclosed in the prospectus. 5) A copy of contract relating to the payment of the commission should be deliver to the registrar. 6) No underwriting commission can be paid if the issue is privately placed. 7) Any sum payable by way of underwriting commission must be disclosed on the asset side of the balance sheet.

    11. LIABILITIES OF UNDERWRITERS. CASE A COMPLETE UNDERWRITING. 1)If the whole of the issue is underwritten only by one underwriter. If whole share is underwritten only by one underwriter, he will be liable to take up all the shares or debentures that have not been subscribed for by the public. Example:- A Ltd. Issued 20,000 equity shares of 10 each. The whole of the issue was underwritten by X. The public applied for 19,000 shares. Calculate the liability of underwriter. No. Of shares issued by A Ltd. 20,000 less- applications received for 19,000 Undersubscribed 1000 A will be liable to take up all the shares remaining unsubscribed i.e. 1000 shares

    12. 2) If the whole of the issue is underwritten by two or more underwriters. If the whole of the issue was underwritten by two or more underwriters, the net of an individual underwriters will be determined as follows: Step 1: find out the gross liability of the individual underwriter as follows: Gross liability= no. Of shares/debentures issued by the company X % of shares/debentures underwritten. Step 2: subtract the marked applications from gross liability. Step 3: subtract the unmarked applications. Credit for unmarked applications must b given to different underwriters in the ratio of: i) gross liability or ii) gross liability less marked applications. The resultant figures will represent the net liability of each underwriter. ( sometimes the resultant fig of one or more underwriters may be in minus. In such a situation step 4 will followed) Step 4: add all minus figures and transfer the resultant figure to other underwriters account in he same ratio.

    13. CASE B- PARTIAL UNDERWRITING 1)If the partial underwriting is done only by one underwriter: Suppose A L td issues 20,000 equity shares of 10 each at par. 80% of the issue is underwritten by X. This is the case of partial underwriting done only by one underwriter. The company will itself be responsible for remaining 20% of issue which is not underwritten. In this case the liability of the underwriter, in different situations, will be determined as follows: i)If information about marked and unmarked applications is available: Step 1: find out the gross liability of the underwriter as follows: