13.

4 Underwriting of Shares and Debentures

1a) When the Issue is Fully Underwriten [without Firm Underwriting
t h e entire issue has been underwritten by one underwriter, the determination ot his liability is verv

The total number of applications (both marked and unmarked) are deducted from the number hares
ple
underwritten and the resultant figure is treated as a liability of the Underwriter. For example, X Ltd
the company reed
,00,000 equity shares of ? 10 cach. The issue was fully underwritten byA. However,
for 60,000 shares.
applications for 80,000 shares which includes marked applications
Here, A's liability will be 1,00,000 60,000- 20,000 20,000 shares. A Would get full credit f
for the
unmarked 20,000 applications.
t the entire issue has been underwritten by a number of underwriters, certain dfficulties may ari.
ar1se In
respect of division of unmarked applications.
The unmarked applications can be divided between the underwriters in the following two ways.

Method 1
Under this method, all unmarked applications are divided between the underwrilers in the ratio ofgrossliahili

individual underwriter. For determining the liability of individual underwriter, the following steps a
of
followed:
Step 1 Compute gross liability (ifit has not been given) of individual underwriter on the basis ofagreed ratin
Forexample, X Ltd. issued 1,00,000 Equity shares ofT 10 each. The issue was underwritten as follows
A-30%; B-40% and C-30%. Here, the gross liability will be: A30% of 1,00,000 =30,000 share
B 40% of 1,00,000 40.000 shares and C 30% of1,00,000- 30,000 shares.
Step 2 Subtract marked applications from gross liability of respective underwriters.
Step 3 Determine the number of unmarked applications. (Unmarked application = Total applications

received less marked applications). Divide unmarked applications between different underwriters in the ratio

of gross liability, as per our example, in the ratio of 3:4:3. If the resultant figures are all positive or zero, then
stop here. Now these figures represents the net liability of each underwriter.
If some of the resultant figures are negative, then continue to Step 4.
Step 4 Add all negative figures and divide the resultant between the underwriters having positive figures in
the ratio of gross liability inter se (for details see Illustration 3).
Repeat Step 4 unless all figures are non-negative. Now these figures represent the net liability of each
underwriter.
Method 2
Under this method, all unmarked applications are divided between the underwriters in the ratio ofgross liability
less marked applications. For determining the liability of individual underwriter, following steps are followed
Step 1 Compute gross liability in the usual manner (if it has not been given).
Step 2 Subtract marked applications from gross liability of respective underwriters. If some of the resultant
figures are negative, then add all negative figures and divide their sum in the ratio of gross liability inter se
(for details, See Ilustration 3 altenative solution).
Step 3 Determine the number of unmarked applications. Divide unmarked applications between difteren
underwriters in the ratio of gross liability less marked applications, i.e., the resultant
figures of Step 2. Ittnc
resultant figures of Step 3 are all positive or zero, then stop here. Now these figures represent the net l1aoluey
of cach underwriter. If some of the resultant
figures are negative, then continue to Step 4.
Step 4 Add all negative figures and divide their sum between the underwriters having the
same ratio of Step 3. Repeat Step 4 unless all figures are non-negative. Now these positive
figures figuresne
represents
liability of each underwriter.
lustration 1
A Ltd. issued 1,00,000 equity shares. The whole
X-40%,; Y - 30%;and Z-30%.
of the issue was underwritten as:
Applications for 80,000 shares were received in all, out of which applications for 20,000 shares had ofX
those for 10,000 shares had that of Y, and 20,000 shares had that of Z. The the sta" did
not bear any stamp. Show the liability of the Underwriters. remaining applications for 30,000
danted
C.S. (Inter)-Adapted
 Corporate Accounting 13.5

Statement Showing the IFigures-No. of shares]

SOtion Liability of Underwriters
Underwniers
MX40%; Y - 30%; and Z - 30%) X Y
30,000
40.0 30,009
M a r k e da p p l i c a t i o n s

20.0 10.000 20.000

20.000 20,000 10.000
applications (Note 1) 9,000
U
lnmarked 12,000 9,000
8,000 11,000 1,000
N el
ti a b l i t y

WorkingNotes:

workim mber of applications received= NO,000. Out of 80,000 only 50,000 applications are marked 20.000. Y-10.000
1 20.000). Therefore. unmarked applications 80.000 - 50,000 30,000 Unmarked applications are distr1buted amon
L mderwiters in theratio of their gross liability i.e 4.3.3
ely, the
the unmarked
unmarked aapplications can be allocated in the ratio of liability after credit of marked applications. The solution

Alternatively.
will be as
follows:
case
that
Statement Showing the Liability of Underwriters Figures- No. of shares]
Undewriters
X
and Z-30%1
t liability(X-40%; Y -30%, 40.0000 30,000 30,000
Iess Marked applications
20,000 10,000 20,000
Liability less
marked applications
20,000 20,000 10,000
GOss
Unmarked applications (2:2:1) 12,000 12.000 6,000
ESs
NerLiablity
8,000 8.000 4,000

e hbilityofeach underwriter may vary widely according to the choice ofthe method adopted. Generaly,
he umderwriting contract contains a provision in this respect.
e he examination if nothing is mentioned, the position should be clarified by way of a note.

lustration 2
n Is January, 2016, Moon Ltd.issued
The whole issue
was
aprospectus inviting applications for subscription in 10,00,000 equity shares of
fully underwritten by A, B, C and D as
10each.
C-35%, andD- 10%.
A-30%; B-25%.;
The aplications were received for 8,00,000 shares of which marked applications were as follows
A-1.80,000; B-2,00,000; C-2,03,000; and D-1,67,000.
Find out the liability of individual underwriters.

Solution Statement Showing the Liability of Underwriters [Figures-No. of shares]

nderwriters 4 B C
GnssLiability(A -30%, B-25%; C-35%; D-10%) 3,00,000 2,50,000 3,50,000 1,00,000
LeSs Marked applications 1,80,000 2,00,000 2,03,000 167,000
1,20,000 50,000 1,47,000 (67.000)
Bs Unmarked applications (Note 2) 15,000 12,500 17,500 5,000
Resutant Liability (or surplus) 1,05,000 37,56 1,29,500 (72,000)
ss Surplus of Dallocaed to A, B and C in the ratio of gross liablity (6:5:7) 24,000 20,000 28,000 72,000
Ner Liability 81,000 17,500 1,01,500 Nil

Working Notes
0)Caleulation of Unmarked Applications:
8,00,000
Total number of applications received
Less: Markedapplications(A: 1,80,000+B:2,00,000+C:2,03,000 +D: 1,67,000) 7,50,000
50,000
Unmarked applications
Share ofUnmarked Applications (Based on 1st Method):
of 50,000 15,000; B-25% of 50,000 = 12,500; C-35% of 50,000 = 17,500; and D -- 10% of 50,000 5,000.

llustration 3
iewton I for 20,000 equity shares of7 10
ach TL ncorporated on lst January 2016 issued a prospectus inviting applications
ne whole issue was fully underwritten by A, B and C as folows:
An.000shares; B-6,000 shares; and C-4,000 shares.
as follows:
A were received for 16,000 shares of which marked applications were
A-8,000 shares, find out theshares;
No e Tequired toB-2,850
a andC-4,150 shares.
liability of individual underwriters.
 13.6 Underwriting of Shares and Debentures
Solution Statement Showing the Liability
of Underwriters
Figures -No. of
A shars.
arn)
Underwriters
10.000 6.000
Gross liability
8000 2850
Less. Marked applications A1
2.000
3.150
500 19
Less. Unmarked applications (Note 1) 1500 2 850
Resultant liability (or surplus) 219 131
Less. Surplus of Calloted to A&Bin the ratio of gross liatility (5.3) 1 281
2.719
Net liabilty
Working Notes: (A-X.0; B-2.Rs0
16,000. Number of marked applications.
()Total numher of applications received
16,000- 15,000 i.000. Unmarked applications
are allocated in the and
the ratio ofz
4,1S0)Therefore,unmarked appiications
liability i e. 5.32

lhustration 4 1or >,00,DO0

equity sharesof?
prospectus inviting applications 10
ofs
1st January, 2016 issued a
Export Ltd. incorporated on
each
fully underwTitten by K.B.D, M as
22000xl4 +
The whole
K-2.00.000. B
issue was
1.50.000: D- 1,00,000; and M-50,000. were as follows:
4000xa
The applications were received for 4.50,000 shares of which
marked applications
15 00
K-2.20.000, B 90,000, D-1.10,000; and M- 10,000.
Find out the liability of individual underwriters
Solution Statement Showing the Liability
of Underwriters Figures-No. of shares
K B D M
Underwriters
2,00,000 1.50.000 1,00.000 50,000
Gross liability
2,20,000 90,000 1,10.000 10.000
Less Manked applicatons
(20.000) 60,000 (10,000) 40,000
8,000 6,000 4,000 2.000
Less:Unmarked applications (Note 1) 54,000 (14,000)
Resultant liability (or surplus (28,000) 38,000
Less Surpius of K &Dalocated to B&Min the ratio of gross liability 28,000 31,500 14,000 10.500
Nil 22.500 Nil 27 500
Net liability
Working Notes:
(K-2.20,000; B-90,000; D-1,10,000
Total number of applications received 4,50.000. Number of marked applications
=

(1) and M-10.000) =4,30,000. Therefore, unmarked applications = 20,000. Unmarked applications are allocated in the ratio of
gross liability i.e.. 4:3:2:1.

Alternative Solution Statement Showing the Liability of Underwriters [Figures- No. of shares
K B D M
Underwrters
2,00,000 1,50,000 1,00,000 50.000
Gross liability
Less Marked applications 2,20,000 90,000 1,10,000 10,000
(20,000) 60,000 (10,000) 40,00
Less Surpius of K&D (20,000+ 10,000) allocated to B& Min the ratio ofgross liability 10,000 (7 500)
20,000 (22,500)
Gross liability less marked application Nil 37,500 Nil 32.500
Less Unmarked application in the ratio of 37,500:32,500 or 15:13 10,714 9.286
Net liability NIl 26,786 Nit 23.214

1 (b) When the Issue is Fully Underwritten (with Firm Underwriting]

If the entire issue has been underwritten by a number of underwriters with some firm underwriting, certa
new difficulties may arise regarding the benefit of firm underwriting. There are wo alternative ways:
i) The benefit of firm underwriting is not given to individual underwriter, or
(i) the benefit of firm underwriting is given to individual underwriter.
 Corporate Accounting 13.7
t of firm underwriting is not
benining the liability of individual given to individual Underwriter:
pute gross liabiliility in the usual manner underwriter, the
following steps are followed:
ract marked applications
2 Subtract mar
(if it has not
been given).
SMep
ne
riters. I fsomne of the resultant figures are found
firm
underwriting) (excluding
from gross liability respective under-
liability. negative, then add all ofe
ralio of
r3 Determine
gross negative figures andi divide the resultant
mnc the nunmber of unmarked
AcCriptions (excluding firm underwriting)
applications as follows:
T o t as
l u b s c r i p t

s
tions (excluding firm
M a r k e da p p l i c a t i o n s

underwriting)
ations by public
narked
t A p p l i c a f i o n s
under fim underwriting
TatalUnmarked a p p l i c a t i o n s
******

1 calculated unmarked applications in the

ahove ****

Dicltant figures of Step 3 are all positive or zero, then

ratio of gross
it re
liability or

er
this step. go to Step 5 (skip Sten d4). represents net liability as per agreement.
af
ofththe resultant figures are negative, then
Ifsome continue to
Add all the negative figures and divide the resultant Step 4
Step of gross liability. Repeat Step 4 unless all between the underwriters
having positive figures
figures
Step 5. are non-negative. Now these figures represent
liability as per agrecement. After this step, go to ures
Add
Step 5 firm underWTiting with the net
liability as per agreement. The resultant figures total represent
liability

Key points to remember

a underwriting is treated as unmarked applications and divided in the ratio
Firm
The liability of underwriter consists of: (a) Net liability as per agreement; and (b)of gross liability.
firm underwriting.
lustration 5
JLud issued 20,000 shares which were underwritten as follows:
A-12,000 shares; B-5,000 shares; and C -3,000 shares.
The underwriters made applications for firm underwriting as:
A-1,600 shares; B-600 shares; and C-2,000 shares.
subscriptions excluding firm underwriting but including marked applications were
The total for 10,000 shares. The
marked applications were: A-2,000 shares; B-4,000 shares; and C- L,000 shares.
You are required to show the allocation of liability of the underwriters.
Solution Statement Showing the Liability of Underwriters Figures-No. of shares]
Underwriters A B C
Gross liability
Less Marked applications (excluding firm underwriting) 12,000 5,000 3.000
2,000 4,000 1,000
Less: Unmarked applications
10,000 1,000 2,000
in the ratio of gross liability (Note 1) 4,320 1,800 1,080
Resutant liability (or surplus)
ESs Surplus of B 5,680 (800) 920
Net iability as per
allocated to A&C in the ratio of 12:3 (640) 800 (160)
kdt. Fim undewriting
agreement 5,040 Nil 760
Tota liability 1,600 600 2,000
6,640 600 2,760
Working Notes : Under this method, firm underwriting is treated as 'unmarked application' and it is dividend in the ratio of gross
liability. Total unmarked applications are calculated as follows
1Calculation of unmarked applications No. (2) Total allocation of shares
ai subscriptions (excluding firm underwriting) No.
E5S Marked 10,000 Unmarked applications by public 3,000
applications (excluding firm underwriting) 7,000 Marked applications by public 7,000
UTimarked applications by public 3,000 Total liability (6,640+600+2,760) 10,000
Kot: Applications under firm
T0tal unmarked applications underwnitng 4,200
V7,200
20,000

N applications are allotted in the ratio of gross liability i.e., 12:5:3

13.8 Underwriting of Shares and Debentures

llustration 6
isee 18.00.000 shares at par
These offer was underwritten by three und.
Calcutta Lid. offered to the public to
60,00) shares each. Suoscriptions totalled 15.80 tery
80 000 shares
Chetan, Dola and Elhias cqually with firm underwriting
includingthe marked forms which were
Chetan5,00,000 shares, Dola -5,40,000 shares; Flhas-4,40.00 shares.
fim undertaking
The underwriters had applied for the number of shares covered by
Calculate the liability of the underuwriters (No. of shares).
Solution Statement Showing the Liability
of Underwriters
Chetan
Figures-No.
Dola
of shares
Underwriters 6.00.000 6,00.000
Flies
GroBs Liablity
6.00 000
5,00.000 5,40,000 4 40 000
Less Marked applications (excluding frm underwrting 1.00.000 60.000 1,80,00
93.3 93.334
Less Unmarked applications in the ratio of gross liability (Note 1) 93 33
6.667 (33,334) 66 667
Resutant Liability (or surplus) 6.667) 33,334
Less: Surplus of Dola alocated to Chetan &Elias equally (10.000) Nil
(16.667
Net Liability as per agreement 10.000
50.00
Less Surpkus of Chetan allocated to Ellias Nil Nil
(10.000)
40,000
60,000 60,000 60,000
Add Fim underwriting
60,000 60.000 1.00.000
Total Liability
Working Notes: 'unmarked application' and it is divided in the ratio of gross liability. To
(1) Under this method. firm underwriting is treated as

unmarked applications are calculated as follows:

(2) Calculation of unmarked applications No. (3) Total allocation of shares No.

15,80,000 Unmarked applications by public 1,00.000

Total subscriptions (excliuding fim underwriting)
14,800.000
Less Marked applications (excl. fim underwriting) 14,80,000 Marked applications by public
Unmarked applications by public 1,00,000 Totalliability (60,000+60,0000+1,00,000) 2.20.00
1,80,000 18,00.000
Add Applications underfirm underwriting (60,000 x3)
Total unmarked applications 2,80,000
Unmarked applications are aliotted equally.

lustration 7
50,00,000 divided into 5 lacs shares of 10 each. the company issued 1,00,000 shares
XLud. has an authorised capital of underwritten as follows
for subscription to public
the at apremium of ? 5 each. the entire issue was
A-60,000 shares (firm underwriting 10,000 shares)
B-30,000 shares (fim underwriting 4,000 shares)
C-10,000 shares (firm underwriting 2,000 shares)
subscribed for. Marked application forms
Of the total issue, only 90,000 shares including fim underwriting
were

excluding firm underwriting were:

A-32,000 shares; B-20,000 shares; C-8,000 shares.
Calculate the liability of each underwriter giving the benefit of firm underwriting to all.

Solution Statement Showing the Liability of Underwriters TFigures-No. of shares]

A 3 C
Underwrters 10,000
Gross Liability 60,000| 30,000
2,000
Les: Marked applicatons (exdluding tim underwntbing) 32,000 20,000 2000
28,000 10,000
3000
Les: Unmarked applications in the ratio of gross liablity (Note 1) 18,000 9,000
(1.000)
Resuitant Liability (or surplus) ,000 1,000 1,000
Less: Surplus of C allocated to A&B in the ratio of 2:1 (667) (333) N
Net Liability as per agreement 9,333 667 2,000
Add: Fim underwniting 10,000 4,000
Total Liability 4,667 2,000
19,333
 Corporate Accounting 13.9

Morting
Notes marked applications
M a t i o no fu n m a

No. (2) Total allocation of shares No.

iptions
excluding fim underwniting) Unmarked applications by public 14,000
0 - 1 0 . 0 0 0 - 4 , 0 0 0 - 2 , 0 0 0

74,000 Marked applications by public 60,000

0a0plications (excl. fim underwriting) 26,000
Markeda 60,000 Total liability (19,333+ 4,667 +2,000)
a p p l i c a b o n s
bypublic 14,000 Total Issue 1,00,000
marhed
t tF i mu n d e n w n t i n g 16,000
y u n m a r k e da p p l i c a t i o n s
30,000
nlications are allotted in the ratio of gross liability, i.c., 6:3:1. A18,000; B-9,000, C- 3,000.
nmarkeda

Mustration8

ne up
blic issue of 3,00,000 equity shares of 10 cach at 15 per share. P. O and R took underwriting
with publi
L i n ratio of 3:2:1 with the provisions of firm underwriting of 20,000, 14,000and 10,000 shares respectively.
public were
aad
4phc
a su n d e r :
ations were recerved tor 2,40,000 shares excluding firm underwriting. The marked ications from

-50,000; R -60,000.
of
P - 6 0 , 0 0 0 : 0

that the benefit

Computetheliability of each underwriter as regards the number of shares to be taken up assuming
erwriting is not given to dividual underwriters.
t i mu n d e r

Solution
Statement Showing the Liability of Underwriters [Figures in No. of Shares]
R
P
Unewniters
1,50,000 1,00,000 50,000
.:2:1)
Gosslacbelity(3
applicabons (excluding fim underwriting) 60,000 50,000 60,000
s Marked
90,000 50,000 (10,000)
ratio of gross liability (Note 1) 57,000 38,000 19,000
s Unmarked aplications in the 12,000 (29,000)
surplus) 33,000
Resutant liability (or 11,600 29,000
to P and Q in the ratio of gross liability (3:2) 17,400
Suplus alloted of R 15,600 400 Nil
Lability as per Agreement
Ne 20,000 14,000 10,000
At Fim underwnTtng 10,000
35,600 14,400
Total lability
Worting Notes: No.
No.(2)Totalallocation of shares
M Calculation ofunmarked applications 2,40,000 Unmarked applications by public 70,000
Toal subscriptiorns (excluding fim underwriting) 1,70,000
Marked applications by public
LESs Marked applications (excluding fim
2,40,000
1,70,000
derwrting) 60000
70,000 Total liability(35,600+ 14,400+ 10,000)
Unmarked applications by public 3,00,000
Aot Aplicaions under fim underwriting ,000
Toal unmarked applications 1,14,000
Umarked applicationsare allotted in the ratio of gross liability, i.e., 3:2:1.
lustration 9 ofR S share. The entire
shares ofR 10 each at a premium per
Sam Ltd invited applications from public for 1,00,000 equity extent of 30%, 30%, 20% and 20% respectively with the
D to the
SUE was underwritten by the underwriters A, B, C and entitled to the
1,000 shares respectively. The underwriters
were
and
provision offirm underwriting of 3,000, 2000, 1,000
maximum commission permitted by law. for 19,000, 10,000, 21,000
shares from public out of which applications
he company received applications forof70,000
A, B, C and D respectively.
a 8,000 shares were marked in favourunderwriters. Also ascertain the underwriting commission payable
to the different
aculate the liability of each of the
underwriters.
Solution Statement Showing the Liability of
Underwriters [Figures-No. of shares]
Uhderwrters A B C D
30,000 30,000 20,000 20,000
Grossliability (3 :3:2:2)
LAss: Marked applications 19,000 10,000 21,000 8,000