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CMA Intermediate · Corporate Accounting and Auditing · Underwriting of Securities

In an issue of 50,000 shares of Rs 10 each, an underwriter was assigned 30,000 shares. The public subscribed for the entire 50,000 shares, none bearing the underwriter's stamp. Under the standard treatment, what is the underwriter's position?

The underwriter has no liability to take up shares because the issue was fully subscribed by the public, but the underwriting commission remains payable on the shares underwritten. Commission compensates the underwriter for the guarantee given, not for the number of shares actually taken up.

  1. ANo liability to take up shares, but commission is payable on the underwritten amountCorrect
  2. BNo liability and no commission is payable
  3. CLiability to take up 30,000 shares
  4. DLiability to take up 20,000 shares

Explanation

Since the issue was fully subscribed, there are no unsubscribed shares, so the underwriter takes up none. Underwriting commission is earned for the guarantee and is payable on the amount underwritten, irrespective of whether the underwriter has to subscribe.

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