agreements-The object of underwriting is to insure against the risk that
shares, debentures or debenture stock offered by a company for subscription may
not be taken up. For floatation of share/debenture capital, a company is
generally required to have the public issue fully underwritten to insure that
all the shares and debentures are taken up by the investor and thus the
required capital is raised. The underwritten provides an assurance against the
risk of under subscription.a. Payment
of commission to underwriter.- The underwriters are entitled to commission.
Section 76 of the Companies Act, 1956, provides as follows:76
(1). A company may pay a commission to any person in consideration of-a. his
subscribing or agreeing to subscribe, whether absolutely or conditionally for
any shares in, or debentures of, the company, orb. his
procuring or agreeing to procure subscription, whether absolute or conditional
for any shares in or debentures of, the company,If
the following condition are fulfilled, namely :-i
the
payment of the commission is authorised by the articles ;ii
the
commission paid or agreed to be paid does not exceed in case of shares five per
cent of the price at which the shares are issued or the amount or rate
authorised by the articles, whichever is less, and in the case of debentures,
two and a half per cent of the price at which the debentures are issued for the
amount or rate authorised by the articles, whichever is less :iii
the
amount or rate percent of the commission paid or agreed to be paid is-a. in
case of shares or debentures offered to the public for subscription, disclosed
in the prospectus; andb. in
the case of shares or debentures not offered to the public for subscription,
disclosed in the statement in lieu of prospectus, or in a statement in the
prescribed form signed in like manner as a statement in lieu of prospectus and
filed before the payment of the commission with the Registrar and where a
circular or notice, not being a prospectus inviting subscription for the share
or debentures, is issued, also disclosed in that circular or notice ;iiiiiiiv. the
number of shares or debentures which persons have agreed for a commission of
subscribe absolutely or conditionally is disclosed in the manner aforesaid; andv.vi.vii. a
copy of the contract for the payment of the commission is delivered to the
Registrar at the time of delivery of the prospectus or the statement in lieu of
prospectus for registration.1.2.
Save
as aforesaid and save as provided in section 78, no company shall allot any of
its shares or debentures or apply any of its moneys, either directly or
indirectly in payment of any commission, discount or allowance, to any person
in consideration of-a. his
subscribing or agreeing to subscribe, whether absolutely or conditionally, for
any shares in, or debentures of, the company; orb. his
procuring or agreeing to procure subscription, whether absolute or conditional,
for any shares in, or debentures of, the company whether the shares, debentures
or money be so allotted or applied by being added to the purchase money of any
property acquired by the company or to the contract price of any work to be
executed for the company, or the money be paid out the nominal purchase money
or contract price, or otherwise.1.2.3.
Nothing
in this section shall affect the power of any company to pay such brokerage as
it has heretofore been lawful for a company to pay.4.
A
vender to, promoter of, or other person who receives payment in shares,
debentures or money from, a company shall have and shall be deemed always to
have had power to apply for any part of the shares, debentures or money so
received in payment of any commission the payment of which, if made directly by
the company, would have been legal under this section.4-A
For
the removal of doubts it is hereby declared that no commission shall be paid
under clause (a) of sub-section (1) to any person on shares or debenture which
are not offered to the public for subscription :Provided
that where a person has subscribed or agreed to subscribes under clause (a) of
sub-section (1) for any shares in, or debentures of, the company and before the
issue of the prospectus or statement in lieu thereof any other person or
persons has or have subscribed for any or all of those shares or debentures and
that fact together with the aggregate amount of commission payable under this
section in respect of such subscription is disclosed in such prospectus or
statement, then the company may pay commission to the first mentioned person in
respect of such subscription.1.2.3.4.5.
If
default is made in complying with the provisions of this section, the company,
and every officer of the company who is in default, shall be punishable with
fine which may extend to five hundred rupees.LETTER
OF ACCEPTANCETo.Dear
Sir,With
reference to your application dated.we accept and admit you as an
underwriter ofordinary shares of our company at commission of.per
cent, upon the footing and subject to the conditions contained in your
application.Yours,
etc.