- Underwriting 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 ofa. his subscribing or agreeing to subscribe, whether absolutely or conditionally for any shares in, or debentures of, the company, or
b. 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 isa. in case of shares or debentures offered to the public for subscription, disclosed in the prospectus; and
b. 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 ;….
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