Determining the Liability of Underwriters

The liability of the underwriter or underwriters would be determined in the following ways:

Complete Underwriting

(a) If the whole of the issue of shares or debentures is underwritten only by one underwriter: In such a case, the underwriter will be liable to take up all the shares or debentures that have not been subscribed for by the public. For determining his liability, it is not material to know how many applications are sent through him and how many applications are received directly by the company. Thus, the liability of the underwriter in such a case will be as follows:

Liability = Shares or debentures offered – Total applications received.

It is to be noted here that if the shares or debentures are oversubscribed or fully subscribed by the public, the underwriter is free from his liability and cannot be called upon to take up any shares or debentures of the company. But he will be entitled to get his commission on the total issue price of the shares or debentures. He must of course take up the shares or debentures as per “Firm Underwriting”. Automatically, this will reduce his liability in case there is under subscription.

(b) If the whole of the issue of shares or debentures is underwritten by a number of underwriters in an agreed ratio: In such a case, the liability of the respective underwriters can be determined as follows:

The gross liability of each underwriter according to the agreed ratio should be reduced first by the marked applications and then credit may be given in respect of unmarked applications sent directly to the company by way of deduction from the balance left in the ratio of their gross liability. Thus, the liability of each underwriter in such a case will be as follows:

Gross liability according to the agreed ratio                                                                                                          ………………
Less: Marked applications                                                                                                                                           ………………
________
Balance left                                                                                                                                                                      ………………
Less: Unmarked applications in the ratio of gross liability                                                                                 ………………
Net liability                                                                                                                                                                      ………………

Sometimes credit to unmarked application is given in the ratio of gross liability as reduced by the marked applications. The individual liability calculated in this way will differ from the liability calculated as per the earlier procedure.

N.B.: In case some figure is in minus then transfer that figure to other underwriters’ account in the ratio of gross
liability inter se. This gives the liability of underwriters on account of short fall in the public subscription.