by Underwriting involves financial commitments from underwriters, and it is essential to calculate liabilities accurately. The two key types of liabilities are Gross Liability and Net Liability. Additionally, underwriting commission is determined based on these liabilities.
1. Gross Liability
Gross Liability refers to the total value of securities underwritten by an underwriter before considering any sub-underwriting, firm underwriting, or other adjustments. It represents the full obligation of the underwriter in case the issue is not subscribed by the public.
Formula for Gross Liability:
Gross Liability = [Total Issue Size × Underwriter’s Commitment Percentage] / 100
Example:
Suppose a company issues ₹10,00,000 worth of shares, and an underwriter agrees to underwrite 40% of the issue.
Gross Liability = [10,00,000 ×40] / 100 = ₹4,00,000
Thus, the underwriter’s Gross Liability is ₹4,00,000.
2. Net Liability
Net Liability is the actual financial burden on the underwriter after considering firm underwriting (securities underwritten by the underwriter themselves) and the proportion of applications received from the public.
Formula for Net Liability:
Net Liability = Gross Liability − Shares Subscribed by the Public + Firm Underwriting Commitment
Example:
Using the previous example where the Gross Liability is ₹4,00,000, assume:
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The public subscribes to ₹3,00,000 worth of shares from the underwriter’s portion.
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The underwriter has committed ₹50,000 under firm underwriting.
Net Liability = 4,00,000 − 3,00,000 + 50,000 = ₹1,50,000
So, the underwriter’s Net Liability is ₹1,50,000.
3. Underwriting Commission Calculation
Underwriting commission is the fee paid to underwriters for assuming the risk of subscribing to any unsold securities. SEBI regulates the commission rates.
Formula for Commission:
Underwriting Commission = [Gross Liability × Commission Rate] / 100
Example:
If the commission rate is 2%, then:
Commission = 4,00,000 × 2 / 100 = ₹8,000
Thus, the underwriter earns ₹8,000 as a commission.
