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CMA Intermediate · Corporate Accounting and Auditing · Underwriting of Securities

Under the rules for underwriting of public issues in India, what is the underwriting commission paid by a company on shares or debentures subject to, as taught in the Underwriting chapter?

Underwriting commission is allowed only when the articles authorise it, it stays within the prescribed maximum rate, and it is disclosed in the offer document. It is calculated on the amount underwritten, not only on what the public subscribes, so there is no unlimited freedom on rate.

  1. AIt may be paid at any rate agreed between the company and the underwriter, with no ceiling
  2. BIt must be authorised by the articles and must not exceed the prescribed maximum rate, with disclosure in the offer documentCorrect
  3. CIt is payable only on shares actually subscribed by the public, not on those taken up by underwriters
  4. DIt is payable only if the issue is oversubscribed

Explanation

The Companies Act permits commission to underwriters only if the articles authorise it, it is within the prescribed maximum rate, and it is disclosed in the prospectus. Commission is payable on the total number of shares underwritten, whether or not the public subscribes. The option limiting it to public-subscribed shares is wrong for this reason.

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