by Underwriting Commission is the fee paid by a company to underwriters for guaranteeing the subscription of shares or debentures in a public issue. It compensates underwriters for their risk in ensuring the securities are fully subscribed. As per SEBI guidelines and the Companies Act, 2013, the maximum commission allowed varies for equity and debt instruments. The commission is recorded as an expense in the company’s financial statements. If the issue is under-subscribed, underwriters purchase the remaining shares, and the commission may be adjusted against their liability or paid separately.
Treatment of Underwriting Commission in the Company’s Books:
Underwriting commission is the fee paid by a company to underwriters for subscribing to the shares or debentures of a public issue in case of under-subscription. As per SEBI guidelines and Companies Act, 2013, the commission is recorded as an expense in the company’s books.
Journal Entries for Underwriting Commission:
| Transaction | Journal Entry | Explanation |
|---|---|---|
| Recording the underwriting commission payable | Underwriting Commission A/c 🡺 Dr. With commission amount To Underwriters A/c |
Commission expense incurred by the company |
| Payment to underwriters | Underwriters A/c 🡺 Dr. To Bank A/c |
Settlement of the commission amount |
Settlement Between the Company and Underwriters
If underwriters purchase unsubscribed shares, settlement can be done through cash payment or adjustment against commission.
Scenario 1: If the Underwriter purchases Unsubscribed Shares
| Transaction | Journal Entry | Explanation |
|---|---|---|
| For Liability of Underwriter (Unsubscribed Shares) | Underwriters A/c 🡺 Dr.
To Share Capital A/c To Securities Premium A/c (if applicable) |
Underwriter’s obligation to purchase unsubscribed shares |
| Adjustment of commission against liability | Underwriting Commission A/c 🡺 Dr.
To Underwriters A/c |
Commission deducted from liability |
| Payment to or from underwriter (if any balance remains) | Underwriters A/c 🡺 Dr.
To Bank A/c (if payable to underwriters) OR Bank A/c 🡺 Dr. To Underwriters A/c (if receivable from underwriters) |
Final settlement |
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