brief note on ‘Undenniting Commission’

In order to ensure against tile risk that shares or debentures offered

to the public for subscription may not be taken up, it has become customary now-a-days for public companies to get their shares or debentures

underwritten before they arc offered for public subscription in return for a commission. An underwriter, therefore, is a person who agrees to take a

specified number of shares or debentures in the event of the public not subscribing for them in consideration of a commission which is called

‘Underwriting Conmlission’.

Section 76 prescribes certain conditions subject to which underwriting

commission may be paid. These are:

1. The payment of commission must be authorised by the articles.

2. The rate of commission should not exceed 5% of the price at which

the shares are issued. In case of debentures it should not exceed 2.5%.

3. The amount or rate per cent of the underwriting commission must be disclosed in the prospectus or statement in Iku of prospectus or in the st:1tement

filed with the Registrar (in case of a private company), as the case may be.

4. The number of shares or debentures which the underwriters have agreed for a commission to subscribe absolutely or conditionally must also be

disclosed in the prospectus or in the statement in lieu of prospectus.

5.A copy of the contmct for the payment of the commission shall be delivered to the Registrar at the time of delivery of the prospectus or the

statement in lieu of prospectus for registmtion. .

The underwriting agreement apart from being a !,’Uamntee to purchase unsold shares or debentllTes. is also an application for shares which are not taken

by the public.

6. Underwriting commission can be paid only in respect of shares or debcntllTcs which have becn offered to the public for subscription in the first

instance. Thus. if shares or debentures are not offered to the public for subscription.

If default has been made in complying with any provisions discussed abovc, the comprll1Y, and evcI)’ defaulting officer of the company shall be punishable

with a fine which may extend to Rs. 5,000.