Statutory Provisions Relating to Underwriting of Shares and Debentures
by In India, underwriting of shares and debentures is governed mainly by the Companies Act, 2013, the rules made under it, and applicable SEBI regulations for securities offered to the public. These provisions regulate underwriting agreements, commission payments, disclosures, and the responsibilities of companies and underwriters. Their purpose is to protect investors, promote transparency, and ensure that securities are issued according to the prescribed legal framework.
1. Section 40(6) of the Companies Act, 2013
Section 40(6) of the Companies Act, 2013 provides the legal basis for a company to pay commission to a person in connection with the subscription of its securities, subject to prescribed conditions. This provision is relevant to underwriting because underwriters help companies obtain subscriptions for shares and debentures. The payment must comply with the applicable rules, the company’s Articles of Association, and relevant disclosure requirements. Companies should maintain proper records of the underwriting agreement and commission paid. Compliance helps ensure transparency in securities issues and protects investors from unauthorised or excessive commission payments. Companies must also consider any additional requirements applicable to public offerings.
2. Rule 13 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
Rule 13 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes conditions for paying commission in connection with subscriptions to securities. The payment must be authorised by the company’s Articles of Association and must comply with the prescribed limits. Commission may be paid out of the proceeds of the issue, the company’s profits, or both, subject to applicable requirements. The rule also establishes conditions concerning disclosure and the securities for which commission may be paid. Companies should verify that the underwriting arrangement complies with the current version of the rule before making payment. These requirements promote accountability and help prevent unauthorised commission expenses.
3. Maximum Limit of Underwriting Commission
The Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribe maximum limits for commission paid in connection with securities subscriptions. Generally, commission on shares must not exceed 5% of the issue price, or the rate authorised by the Articles of Association, whichever is lower. For debentures, the corresponding limit is generally 2.5% of the issue price, or the rate authorised by the Articles, whichever is lower. For example, if shares are issued at ₹100 each, the statutory percentage ceiling is ₹5 per share, subject to a lower limit in the Articles. Companies must calculate commission carefully and comply with all applicable conditions.
The maximum commission under Rule 13 is generally as follows:
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Shares: Up to 5% of the issue price, or the rate authorised by the Articles of Association, whichever is lower.
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Debentures: Up to 2.5% of the issue price, or the rate specified in the Articles of Association, whichever is lower.
Example: If shares are issued at ₹100 each, the statutory percentage limit is ₹5 per share, subject to any lower limit in the Articles.
4. Disclosure in the Prospectus
Disclosure in the prospectus is an important requirement for transparency in underwriting arrangements. The prospectus should provide the prescribed information about underwriting commission, including the relevant details of the underwriters, the commission payable, and the securities covered by the arrangement. Such information enables prospective investors to understand the costs associated with issuing securities and the extent to which subscriptions are supported by underwriting commitments. Accurate disclosure also helps regulatory authorities examine whether the company has complied with applicable legal requirements. Companies must ensure that prospectus information is complete, consistent, and accurate. Any additional disclosure requirements applicable under SEBI regulations must also be followed.
5. Restrictions on Commission Payment
The payment of underwriting commission is subject to restrictions under the applicable rules. Generally, commission cannot be paid on securities that are not offered to the public for subscription. This requirement connects the commission payment with the relevant public securities issue and prevents companies from claiming commission for securities outside the permitted arrangement. Companies must also ensure that the payment is authorised, properly documented, and within the prescribed limits. The underwriting agreement should clearly identify the securities covered and the responsibilities accepted by the underwriter. Compliance with these restrictions helps maintain accurate financial records, discourages improper payments, and supports transparent capital-raising practices.
6. Filing of the Underwriting Agreement
Companies must comply with the prescribed documentation and filing requirements relating to underwriting commission. Under Rule 13, the relevant contract for payment of commission, or the prescribed particulars where applicable, must be delivered to the Registrar of Companies in connection with the prospectus registration process. The agreement should clearly state the commission payable, the securities covered, and the obligations of the parties. Proper documentation provides evidence of the arrangement and allows regulatory authorities to examine compliance. Companies should preserve copies of contracts, payment records, and supporting approvals. Failure to maintain or submit required documentation may create compliance difficulties and expose the company to consequences under applicable law.
7. SEBI Regulations Governing Underwriting
Public issues of securities may also be governed by regulations issued by the Securities and Exchange Board of India (SEBI). The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended, contain requirements relevant to specified public issues and underwriting arrangements. Other applicable SEBI regulations govern the registration and conduct of eligible market intermediaries. Underwriters must fulfil their contractual commitments and comply with the requirements relevant to the particular issue. Companies should verify the applicable regulations according to the type of securities, nature of the offering, and role of the intermediary. These provisions promote orderly securities markets, transparent disclosures, and investor protection.
Importance of Statutory Compliance in Underwriting of Shares and Debentures
1. Legal Compliance
Statutory compliance ensures that companies follow the Companies Act, 2013, applicable rules, and relevant SEBI regulations when underwriting shares and debentures. Companies must comply with prescribed commission limits, disclosure requirements, and documentation procedures. Following these legal provisions helps prevent violations and reduces the risk of penalties or regulatory action. It also ensures that underwriting agreements are properly authorised and executed. Legal compliance provides a framework for conducting securities issues in an orderly and responsible manner.
2. Protection of Investors
Statutory compliance protects investors by ensuring that companies provide accurate information about securities issues and underwriting arrangements. Proper disclosures help investors understand the financial position of the company, the terms of the issue, and the role of underwriters. These requirements reduce the possibility of misleading statements and unfair practices. Investors can make better-informed decisions when companies follow applicable laws. Effective compliance also strengthens trust between companies, underwriters, and investors in the securities market.
3. Transparency in Financial Transactions
Compliance promotes transparency in underwriting transactions by requiring companies to maintain appropriate agreements, records, and disclosures. Details of underwriting commission, the securities covered, and the responsibilities of the parties should be documented as required by law. Transparent reporting helps shareholders, investors, auditors, and regulators understand how the issue was conducted. It also makes it easier to verify the accuracy of financial statements and identify irregularities. Transparency improves accountability and supports confidence in corporate fundraising activities.
4. Prevention of Excessive Commission
Statutory provisions prescribe limits and conditions for underwriting commission. Compliance ensures that companies do not pay commission beyond the permitted amount or without the necessary authorisation. Excessive commission can reduce the net funds available for business activities and increase the cost of raising capital. By following the applicable rules and the company’s Articles of Association, companies can control these expenses. Proper calculation and documentation of commission also help prevent financial errors and unauthorised payments.
5. Accountability of Companies and Underwriters
Statutory compliance establishes responsibilities for companies and underwriters involved in securities issues. Companies must fulfil their disclosure and documentation obligations, while underwriters must meet their contractual commitments and applicable regulatory requirements. Clear agreements help determine each party’s duties and liabilities. Maintaining proper records also allows management and regulatory authorities to review the transaction when necessary. This accountability discourages irresponsible conduct, improves professional standards, and helps resolve disputes arising from underwriting arrangements.
6. Prevention of Fraud and Misconduct
Compliance with statutory requirements helps reduce fraud, manipulation, and other improper practices in securities issues. Accurate disclosures, valid agreements, prescribed filings, and proper accounting records make it easier to detect irregularities. Companies and underwriters are encouraged to follow established procedures rather than engage in misleading or unauthorised activities. Although compliance cannot eliminate every risk, it creates safeguards that strengthen the integrity of the fundraising process. These safeguards contribute to a more reliable and disciplined securities market.
7. Improvement in Corporate Reputation
A company that follows statutory requirements demonstrates responsible management and respect for investor interests. Compliance can improve the company’s reputation among shareholders, lenders, financial institutions, and potential investors. A strong compliance record may also make future fundraising activities more credible and organised. Conversely, legal violations and undisclosed transactions can damage public confidence and create difficulties in attracting investment. Therefore, maintaining proper underwriting procedures supports the company’s long-term credibility and strengthens its relationships with financial stakeholders.
8. Smooth Capital-Raising Process
Statutory compliance helps companies conduct the issue of shares and debentures efficiently by ensuring that legal procedures are completed correctly. Proper authorisation, documentation, disclosures, and commission calculations reduce the likelihood of objections, delays, and disputes. Companies can plan their financing activities more effectively when they understand their legal responsibilities in advance. Compliance also supports coordination between management, underwriters, auditors, and legal advisers. As a result, the fundraising process becomes more orderly, reliable, and suitable for achieving the company’s financial objectives.