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CMA Intermediate · Corporate Accounting and Auditing · Underwriting of Securities

Kaveri Foods Ltd issued 2,00,000 equity shares of ₹10 each at par. The whole issue was underwritten by Rao Securities at a commission of 3% of the issue price. The public subscribed for only 1,50,000 shares. Assuming no marked applications or firm underwriting, what net amount will Rao Securities pay the company after setting off its commission?

Rao Securities pays ₹4,40,000. It takes up 50,000 unsubscribed shares worth ₹5,00,000, and its commission is earned on the entire underwritten issue of ₹20,00,000 at 3%, which is ₹60,000. Setting the commission off against the amount due leaves ₹4,40,000 payable.

  1. A₹5,00,000
  2. B₹4,85,000
  3. C₹4,40,000Correct
  4. D₹5,60,000

Explanation

Unsubscribed shares = 50,000, so the amount due from the underwriter = 50,000 x 10 = ₹5,00,000. Commission is on the whole underwritten issue = 2,00,000 x 10 x 3% = ₹60,000. Net payable = 5,00,000 - 60,000 = ₹4,40,000. Using commission only on the shares taken up (₹15,000) would give ₹4,85,000, which is wrong.

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