Calculation of Underwriting Commission (excluding Journal entries)

Underwriting Commission is the payment made by a company to underwriters for guaranteeing the subscription of its shares or debentures. Underwriters assure that if the public does not subscribe fully, they will purchase the unsubscribed portion. This reduces the company’s risk of under-subscription. The commission is usually a fixed percentage of the total value underwritten and is regulated under the Companies Act (commonly up to 5% for shares and 2.5% for debentures). It may be paid in cash, securities, or both, as agreed in the underwriting contract.

Underwriting commission is normally calculated on the amount underwritten (i.e., gross number of shares/debentures underwritten × issue price per share/debenture).

Formula:

Commission = Gross underwritten quantity × Issue price per unit × Commission rate (%)

Notes

• Issue price = face value + any share premium (use full issue price).

• Commission rate and mode of payment are set in the underwriting agreement and must comply with Companies Act limits (commonly: up to 5% for shares; 2.5% for debentures — check local law/Articles).

• Commission is usually payable on gross liability (the number agreed to be underwritten), not on net liability, unless the agreement specifies otherwise.

• Commission may be paid in cash, by allotment of securities, or partly both, as per agreement.

Worked Example A — Single underwriter (simple)

Company issues 10,000 shares at ₹10 each. Underwriter X underwrites the whole issue at 3% commission.

Commission = 10,000 × ₹10 × 3% = 10,000 × 0.30 = ₹3,000

So Underwriter X’s commission = ₹3,000.

Worked Example B — Multiple underwriters (commission based on gross underwritten)

Company issues 12,000 shares at ₹15 (face ₹10 + premium ₹5). Underwriters: A = 6,000; B = 4,000; C = 2,000. Commission rate = 2%.

Compute for each on gross underwritten:

• A: 6,000 × ₹15 × 2% = 6,000 × 0.30 = ₹1,800

• B: 4,000 × ₹15 × 2% = 4,000 × 0.30 = ₹1,200

• C: 2,000 × ₹15 × 2% = 2,000 × 0.30 = ₹600

Total commission payable = ₹3,600.

(If the agreement specified payment only on shares actually taken by underwriters, recalc on actual taken quantity — always follow contract terms.)

Worked Example C — Mixed situation with firm underwriting (commission still on gross)

Use earlier Full Underwriting Example: Issue = 12,000 shares at ₹10. Underwriters A=6,000, B=4,000, C=2,000. Commission = 2.5%.

Commission per underwriter (on gross):

• A: 6,000 × 10 × 2.5% = 6,000 × 0.25 = ₹1,500

• B: 4,000 × 10 × 2.5% = 4,000 × 0.25 = ₹1,000

• C: 2,000 × 10 × 2.5% = 2,000 × 0.25 = ₹500

Total commission = ₹3,000.

(Here firm underwriting numbers are part of the gross liability — commission calculation is unaffected by whether some of those shares are firm, marked, or unmarked.)

Special practical points:

• If commission is specified per share instead of percentage, multiply per-share commission × gross underwritten quantity.

• If issue price varies across tranches, compute commission separately per tranche.

• If commission is partly in shares, compute cash equivalent of shares (issue price × number of commission-shares) to find cash portion.

• Always confirm whether the underwriting agreement uses gross liability or actual taken as the base for commission — that clause controls the computation in practice.