Corporate Accounting and Auditing · Underwriting of Securities

Underwriting of Shares and Debentures: Basics for CMA Inter

Updated 10 October 2026 · Fact-checked

Underwriting is an agreement where an underwriter promises to subscribe to the shares or debentures that the public does not take up in an issue, in return for a commission. It protects the company from under-subscription. Know the parties, commission limits, and the difference between firm and conditional underwriting.

Understand Underwriting of Shares and Debentures: Basics

A company issues shares or debentures to the public to raise money. It cannot be sure the public will subscribe to the full issue. If the issue falls short, the company may not collect the minimum amount it needs. Underwriting is the safety net for this risk.

An underwriter is a person or firm (such as a bank, broker or financial institution) that agrees to take up the securities not subscribed by the public, up to an agreed number. For this service the company pays an underwriting commission. The company that issues the securities is the issuer. If the underwriter has agreed to take up a certain number of securities, that number is its underwritten amount.

The purpose is simple. The company gets assurance that the issue will be fully subscribed, or at least that the minimum subscription will be met. Investors also gain confidence when a reputed underwriter backs the issue. An issue can be underwritten by one underwriter or by several. Where there are several, each one's liability is limited to what it agreed to take.

Underwriters may also appoint sub-underwriters. A sub-underwriter shares part of the underwriter's risk and usually receives part of the commission. The company deals only with the main underwriter. The sub-underwriter is answerable to the underwriter, not to the company.

The legal framework has two parts. Section 40(6) of the Companies Act, 2013, read with Rule 11 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, allows a company to pay commission to any person for subscribing or agreeing to subscribe to its securities, within the prescribed limits. The commission must be authorised by the articles and disclosed in the prospectus. SEBI rules for public issues also apply to listed or listing companies, including requirements on underwriters' registration and on disclosure in the offer document.

Key rules to remember

Commission limit on shares: Maximum commission on shares ≤ 5% of the issue price; Under Section 40(6) of the Companies Act, 2013 and Rule 11 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. The commission must be authorised by the articles and disclosed in the prospectus.
Commission limit on debentures: Maximum commission on debentures ≤ 2.5% of the issue price; Same Section 40(6) and Rule 11 basis, and the same conditions: authorised by the articles and disclosed in the prospectus. Commission is calculated on the issue price, not the face value, unless the question says otherwise.
Underwriting commission: Commission = Rate % × Issue price of securities underwritten; Unless stated otherwise, commission is on the total amount underwritten, whether or not the public takes up the shares.
Underwriter's liability (basic): Underwriter's liability = Shares underwritten − Shares subscribed by the public; This applies when one underwriter covers the whole shortfall. The liability cannot be more than the shares underwritten, and it is nil if the public subscribes in full. Marked applications and unmarked applications, which matter when there are several underwriters, are handled in later topics.

How to solve Underwriting of Shares and Debentures: Basics questions

Use this method for a theory question or a short numerical question on the basics of underwriting.

1Identify what is asked: meaning, parties, commission, or type of underwriting.
2Define underwriting in one sentence: an agreement to take up unsubscribed securities for a commission.
3Name the parties involved: the company, the underwriter, and any sub-underwriter.
4For commission questions, apply the limits under Section 40(6) and Rule 11: up to 5% of the issue price for shares and up to 2.5% for debentures. Mention that the commission must be authorised by the articles and disclosed in the prospectus.
5For type questions, state the type: firm underwriting or conditional underwriting (and sub-underwriting if asked).
6Write the key difference clearly: firm underwriting is a commitment to take a fixed number regardless of public response; conditional is only for the unsubscribed balance.
7Add one line on the legal basis: Companies Act, 2013 and SEBI requirements.
8Close with the result, such as the commission amount or the liability stated.

Quickest way: Three-line recall for MCQs

When to use it: Use in Section A when a question asks for a definition, limit or type of underwriting.

Underwriting means a guarantee to take up unsubscribed securities.
Limits under Section 40(6) and Rule 11: shares up to 5%, debentures up to 2.5% of the issue price, if authorised by the articles and disclosed in the prospectus.
Firm means a fixed number taken in any case; conditional means only the shortfall.

Common mistakes in Underwriting of Shares and Debentures: Basics

Mixing up the commission limits for shares and debentures.
Both limits look similar and are learnt together.
Fix: Remember that debentures carry the lower limit, 2.5%, and shares the higher, 5%, both on the issue price under Section 40(6) and Rule 11.
Treating firm underwriting as the same as conditional underwriting.
Both involve taking up shares, so the difference seems small.
Fix: In firm underwriting the underwriter takes the agreed shares whether or not the public subscribes. In conditional underwriting the duty arises only on a shortfall.
Calculating commission on face value when the issue is at a premium.
Students assume nominal value is the base for every calculation.
Fix: Use the issue price unless the question says otherwise.
Saying the sub-underwriter is liable to the company.
Students forget the contractual chain.
Fix: The sub-underwriter's contract is with the underwriter. The company holds only the underwriter liable.
Assuming underwriting is compulsory for every issue.
The word 'guarantee' sounds like a legal requirement.
Fix: Underwriting is a voluntary arrangement unless a specific law or rule requires it for a particular issue.
Forgetting the conditions for paying commission.
Students learn only the percentage limits.
Fix: Add that the commission must be authorised by the articles and disclosed in the prospectus.

Worked examples

Example 1

A company issues 1,00,000 equity shares of ₹10 each at par. It agrees to pay underwriting commission at 4% on the issue price. Calculate the commission and state whether it is within the limit for shares.

Show the solution

Issue price of the shares underwritten = 1,00,000 × ₹10 = ₹10,00,000.
Commission at 4% = ₹10,00,000 × 4 ÷ 100 = ₹40,000.
The limit for shares under Section 40(6) and Rule 11 is 5% of the issue price. Since 4% is below 5%, it is within the limit, provided the articles authorise it and the prospectus discloses it.

Answer: Commission is ₹40,000, which is within the 5% limit.

Example 2

Explain the difference between firm underwriting and conditional underwriting. Also state who a sub-underwriter is.

Show the solution

Firm underwriting: the underwriter agrees to take up a stated number of shares or debentures whether or not the public subscribes. The firm number is treated as applied for by the underwriter when working out liability for the rest of the issue.
Conditional underwriting: the underwriter's duty to take up securities arises only if the public subscribes less than the amount underwritten, and only for the shortfall.
Sub-underwriter: a person who agrees with the underwriter to take up part of the underwriter's obligation and shares the risk and commission.
The company's contract is only with the underwriter.

Answer: In firm underwriting the commitment to take a stated number is unconditional. In conditional underwriting the underwriter acts only for the unsubscribed shortfall. A sub-underwriter shares the underwriter's risk under a separate contract.

Exam tips

Learn the two commission limits by heart: shares 5%, debentures 2.5% of the issue price, under Section 40(6) and Rule 11. They are common MCQ items.
In a written answer, give a one-line definition, the parties, the purpose and the types in that order to earn step marks.
Read the question for the base of commission: issue price, not face value, unless told otherwise.
State that commission must be authorised by the articles and disclosed in the prospectus.
Do not confuse firm underwriting with the firm (partnership) that may act as underwriter.

Practice questions from Underwriting of Securities

Underwriting of Shares and Debentures: Basics: frequently asked questions

What is underwriting of shares and debentures?

It is an agreement where an underwriter promises to take up the securities that the public does not subscribe to, for a commission. The company is thus protected from a failed issue. It applies to both shares and debentures.

What are the underwriting commission limits under the Companies Act?

Under Section 40(6) of the Companies Act, 2013 and Rule 11 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, commission is up to 5% of the issue price for shares and up to 2.5% for debentures. It must be authorised by the articles and disclosed in the prospectus.

What is the difference between firm underwriting and conditional underwriting?

In firm underwriting the underwriter takes up a stated number of securities regardless of public response. In conditional underwriting the underwriter takes up only the securities left unsubscribed, up to the amount underwritten.

What is sub-underwriting?

The underwriter appoints another person to share part of the underwriting risk. The sub-underwriter is liable to the underwriter only, and usually receives part of the commission.