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CMA Intermediate · Corporate Accounting and Auditing · Underwriting of Securities

Meridian Infra Ltd offered 1,00,000 equity shares to the public. Underwriter X underwrote 60,000 shares firm, and the public subscribed only 80,000 shares in total. Applications bearing X's stamp were 50,000 shares. As regards gross liability, how many shares does X have to take up?

Gross liability equals the shares the underwriter agreed to underwrite, so X's gross liability is 60,000 shares. Marked applications are deducted only when working out net liability, and the public subscription level does not change the gross figure.

  1. A60,000 sharesCorrect
  2. B50,000 shares
  3. C10,000 shares
  4. DNil, since the issue was subscribed 80%

Explanation

Gross liability of an underwriter is the number of shares underwritten, here 60,000. Marked applications and firm underwriting are dealt with only later, when computing net liability. The 50,000 figure wrongly equals the marked applications and 10,000 is the difference, which is a net-liability style step.

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