by - Fully Underwritten:
When the Entire Issue is Underwritten, i.e., Fully Underwritten:
It is of two types:
(a) When Full Underwriting is done by one person.
(b) When Full Underwriting is done by more than one person.
(a) When Full Underwriting is done by one person:
If the entire issue is underwritten by one person he will be given the full credit. As such, his liability will be just equal to the number of shares underwritten minus the number of shares applied for; and, if the shares are fully or over-subscribed, there will be no liability. He will, in that case, get his agreed commission.
The following illustration will make the principle clear:
(b) When Full Underwriting is done by more than one underwriter:
Sometimes the entire issue may be underwritten by more than one underwriter.
In other words, if the full underwriting is taken by two or more underwriters in an agreed ratio, the following process should carefully be followed:
Step I: Calculate the Gross/Total Liability of each Underwriter as per agreed ratio;
Step II: Deduct Marked Application (excluding firm’s Underwriting) from such total liability;
Step III: Deduct Unmarked Applications as per Gross/Total liability ratio; Deduct Firm Underwriting, if any;
Step IV: If any minus figure appears, transfer the same to others underwriter’s account in the ratio of Gross/Total Liability.
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Partial Underwriting:
(a) When a part of the issue of shares or debentures is underwritten by one person only. In such a case, only a part of the whole issue is underwritten only by one underwriter and the balance amount is deemed to have been underwritten by the company itself. In such a situation the unmarked applications are treated as marked application from the point of view of the company.
The liability is determined as follows:
Net Liability = Gross Liability – Marked Applications
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Firm Underwriting:
It is an underwriting agreement where the underwriter or underwriters agree to buy a certain number of shares or debentures irrespective of the number of shares or debentures subscribed by the public. It is a case of firm underwriting.
Thus, in firm underwriting, the underwriters agree that a certain number of shares be allotted to them, whether or not the issue is over-subscribed. The liability of the underwriters in such a case will be the unsubscribed shares or debentures plus the shares or debentures under firm underwriting.
Total Liability = (Net liability for unsubscribed on the basis of underwriting agreement) + (Liability under firm Liability)
In the calculation of net liability, the shares under firm underwriting may be treated as marked or unmarked application. The liability of underwriters differs under the two methods. The steps involved under both the methods are given followed by an illustration worked out under both the methods.
