by When a company issues shares or debentures to the public, applications for subscriptions are received from various investors. These applications can be classified into marked applications and unmarked applications. The distinction between these two types is important in the underwriting process, as it determines the allocation of shares and the liability of underwriters.
In underwriting, an underwriter guarantees the sale of securities by agreeing to subscribe to any portion that remains unsold. The classification of applications helps in computing the underwriters’ liabilities accurately.
Marked Applications
Marked applications refer to those applications that bear a specific mark or code identifying the underwriter responsible for procuring the application. These applications indicate that the investor has subscribed to the issue due to the efforts of a particular underwriter.
Since marked applications can be traced back to specific underwriters, they are credited to those underwriters when calculating their liabilities. The company issuing securities considers the marked applications as the underwriter’s contribution to the issue.
Example:
If an underwriter promotes the sale of 10,000 shares and receives applications with their mark, these 10,000 shares will be credited to their underwriting efforts.
Characteristics of Marked Applications:
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They contain a unique mark, stamp, or code identifying the underwriter.
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They help determine the share of applications brought in by each underwriter.
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They reduce the underwriter’s liability as the applications are credited to them.
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They are useful for assessing the performance of different underwriters.
Unmarked Applications
Unmarked applications refer to those applications that do not contain any specific mark or indication of being procured by a particular underwriter. These applications are received directly from the public without any attribution to an underwriter’s effort.
Since these applications cannot be assigned to any underwriter, they are distributed among all underwriters based on their agreed underwriting proportion. This ensures fair distribution of underwriting responsibility.
Example:
If a company receives 50,000 unmarked applications and has four underwriters with equal agreements, each underwriter will be assigned 12,500 shares from these unmarked applications.
Characteristics of Unmarked Applications:
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They do not carry any mark identifying an underwriter.
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They are received directly from the public without underwriter intervention.
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They are proportionally allocated among all underwriters.
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They increase the underwriting liability as they must be shared by all underwriters.
Key differences Between Marked and Unmarked Applications
| Feature | Marked Applications | Unmarked Applications |
|---|---|---|
| Definition | Applications that bear an underwriter’s mark. | Applications without any underwriter’s mark. |
| Identification | Can be traced to a specific underwriter. | Cannot be traced to any specific underwriter. |
| Underwriter’s Liability | Reduces the underwriter’s liability. | Shared proportionally among all underwriters. |
| Source | Brought in through underwriter’s efforts. | Received directly from the public. |
| Allocation | Credited to the specific underwriter. | Distributed among all underwriters. |
Role of Marked and Unmarked Applications in Underwriting Liability:
Underwriting liability is the number of shares an underwriter must subscribe to in case of under-subscription. The calculation of underwriting liability depends on marked applications, unmarked applications, and under-subscription levels.
Step-by-Step Process of Determining Underwriting Liability:
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Total Subscription Received: Identify the total number of applications received.
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Marked Applications: Assign the marked applications to the respective underwriters.
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Unmarked Applications: Distribute unmarked applications among all underwriters in proportion to their underwriting agreements.
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Under-subscription: Calculate the number of shares remaining unsubscribed after marked and unmarked applications are adjusted.
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Final Liability of Underwriters: Each underwriter is responsible for purchasing the unsubscribed portion as per their agreement.
Example Calculation:
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Total shares issued: 1,00,000
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Total subscriptions received: 80,000
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Marked applications: 50,000 (Credited to respective underwriters)
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Unmarked applications: 30,000 (Distributed among underwriters)
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Under-subscription: 20,000 (To be borne by underwriters)
Importance of Marked and Unmarked Applications:
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Fair Allocation of Underwriting Liability
The distinction between marked and unmarked applications ensures that underwriters are credited for their efforts and share the burden of unmarked applications fairly.
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Reducing Underwriters’ Risk
Marked applications help reduce the underwriter’s liability, as they prove the underwriter’s ability to generate subscriptions.
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Effective Underwriting Performance Evaluation
Companies can evaluate the effectiveness of individual underwriters based on the number of marked applications attributed to them.
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Compliance with SEBI Regulations
Proper classification ensures compliance with SEBI (Securities and Exchange Board of India) regulations, which govern underwriting practices and liabilities.
Challenges in Handling Marked and Unmarked Applications:
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Disputes in Marking Applications
Underwriters may claim applications as marked to reduce their liability, leading to disputes between underwriters and companies.
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Allocation of Unmarked Applications
Fairly distributing unmarked applications among underwriters can be challenging, especially when multiple underwriters are involved.
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Ensuring Transparency and Fairness
Companies must ensure that the marking process is transparent and that no underwriter is unfairly credited or burdened.
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