Underwriting of Shares and Debentures: Meaning, Types, Commission and Accounting Entries (Overview) Questions

Question 1

Define underwriting of shares.

Accepted Answer

Underwriting is an agreement in which an underwriter guarantees subscription by agreeing to take up the unsubscribed portion of an issue for a commission.

Question 2

Who is an underwriter?

Accepted Answer

An underwriter is a financial intermediary who agrees to subscribe to the shortfall in a public issue in return for underwriting commission.

Question 3

What is underwriting commission?

Accepted Answer

Underwriting commission is the fee paid to an underwriter for guaranteeing subscription and helping market the issue.

Question 4

What are marked applications?

Accepted Answer

Marked applications are applications that can be identified as being procured through a particular underwriter (i.e., attributable to that underwriter).

Question 5

What is firm underwriting?

Accepted Answer

Firm underwriting is the number of securities the underwriter agrees to subscribe irrespective of the public subscription, in addition to normal liability.

Question 6

State one purpose of underwriting.

Accepted Answer

One purpose of underwriting is to protect the company against under-subscription and ensure minimum funds are raised.

Question 7

Explain the need/importance of underwriting (any three points).

Accepted Answer

Underwriting is important because it:

- ensures **minimum subscription** and availability of funds.
- increases investor **confidence** as the issue is backed.
- helps in **marketing/distribution** of securities through underwriters.

Thus, it reduces the risk of issue failure due to under-subscription.

Question 8

Explain types of underwriting (any three).

Accepted Answer

Any three types of underwriting:

- **Full underwriting**: entire issue is underwritten.
- **Partial underwriting**: only a part of issue is underwritten.
- **Joint underwriting**: issue is underwritten by more than one underwriter in agreed ratio.

(Sub-underwriting can also be written: sharing part of risk with sub-underwriter.)

Question 9

Differentiate between marked and unmarked applications.

Accepted Answer

Marked vs unmarked applications:

| Basis | **Marked** | **Unmarked** |
|---|---|---|
| Identification | attributable to a specific underwriter | not attributable to any underwriter |
| Effect | reduces that underwriter’s liability first | shared among underwriters (gross ratio) |
| Example | stamped application forms | applications without stamp |

Both are used to compute underwriter’s net liability.

Question 10

Explain underwriter’s liability (net liability) computation logic with a neat table.

Accepted Answer

Underwriter’s **net liability** is the number of securities the underwriter must take up.

| Step | Computation |
|---|---|
| 1 | **Gross liability** (as per agreement ratio) |
| 2 | Less: **Marked applications** (of that underwriter) |
| 3 | Less: share of **unmarked applications** (in gross ratio) |
| 4 | = **Net liability** |

Firm underwriting is added/treated separately as per terms of the problem.

Question 11

Explain sub-underwriting and state its advantage (any two points).

Accepted Answer

**Sub-underwriting** means an underwriter transfers a part of his underwriting risk/liability to another underwriter (sub-underwriter).

Advantages (any two):
- **Risk sharing**: reduces burden on main underwriter.
- **Wider distribution**: sub-underwriters help in marketing and collecting applications.
- Better capacity to handle large issues.

| Party | Role |
|---|---|
| Underwriter | main guarantor |
| Sub-underwriter | shares part of liability |

Question 12

State the treatment of unmarked applications in joint underwriting (short).

Accepted Answer

In joint underwriting, **unmarked applications** are generally distributed among underwriters in the ratio of their **gross underwriting liability** (unless the question specifies another basis).

Flow (write): Unmarked apps → Allocate in gross ratio → Reduce each underwriter’s liability

Question 13

Pass journal entries for underwriting commission (commission due and commission paid).

Accepted Answer

### (1) Underwriting commission due
**Underwriting Commission A/c Dr**  
  To **Underwriters A/c**

### (2) Commission paid
**Underwriters A/c Dr**  
  To **Bank A/c**

| Entry | **Effect** |
|---|---|
| Commission due | recognises issue expense and payable |
| Payment | settles payable |

### Conclusion
Underwriting commission is treated as an **issue expense** and paid to underwriters for guarantee/service.

Question 14

Explain firm underwriting and its treatment in liability calculation (exam-style).

Accepted Answer

**Firm underwriting** is the quantity of shares/debentures the underwriter agrees to subscribe **irrespective** of public subscription.

### Why it exists
- Underwriter may want to invest/participate in the issue.
- Company gets additional subscription support.

### Treatment in liability (general exam approach)
- First compute **net liability** for each underwriter based on gross liability minus marked and share of unmarked applications.
- Then consider **firm underwriting** as additional commitment as per problem terms (often added separately).

Flow (write): Gross liability → Less marked/unmarked → Net liability → Add firm underwriting (as per terms)

### Conclusion
Firm underwriting increases assured subscription and is handled carefully as per the given agreement in the question.

Question 15

Explain joint underwriting and unmarked applications distribution with a neat table and conclude.

Accepted Answer

### Joint underwriting
Joint underwriting means two or more underwriters underwrite an issue in agreed proportions to share risk.

### Unmarked applications distribution
Unmarked applications are not attributable to any underwriter, so they are shared among underwriters typically in **gross liability ratio**.

| Item | **Basis** |
|---|---|
| Gross liability | agreement ratio (A:B:C) |
| Unmarked apps share | same gross ratio |

### Conclusion
In joint underwriting, correct sharing of unmarked applications is essential to compute each underwriter’s net liability accurately.

Underwriting of Shares and Debentures: Meaning, Types, Commission and Accounting Entries (Overview)

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