by It is lawful for a company to pay commission to an underwriter, subject to the following restrictions, according to Sec. 76 of the Companies Act of 1956.
(1) The payment of commission is authorised by the Article.
(2) The commission paid or agreed to be paid does not exceed in the case of shares, 5% of the price at which the shares are issued or the amount or rate authorised by the Article, whichever is less.
(3) The commission paid or agreed to be paid does not exceed in case of debentures, 2Vi% of the price at which the debentures are issued or the amount or rate authorised by the Article, whichever is less.
(4) The rate of commission and the number of shares which persons have agreed to subscribe absolutely or conditionally are disclosed in the prospectus. However, brokerage can be paid in addition to the payment of commission.
(5) Commission should not be given on those shares which are not issued to the public.
The Balance sheet of a company, prepared according to the prescribed form, should also disclose, under the head ‘Miscellaneous Expenditure’ all sums payable by way of commission, brokerage etc.
Pursuant to the guidelines issued by the Stock Exchange Division of the Department of Economic Affairs, Ministry of Finance vide their letter of 7th May 1985; the following rates for payment of under-writing commission, brokerage and managing broker’s remuneration are in force:
A company may enter into an underwriting or brokerage agreement for the sale of its shares and debentures. An underwriter guarantees that if the public do not take up all the shares, the underwriter will himself purchase the remaining shares and thus the company is able to obtain subscription for all the shares issued.
The company undertakes to pay an underwriting commission for the services rendered by the underwriters. According to Companies Act, underwriting commission should not exceed 5 per cent of the nominal value of a share and 2½ per cent in the case of debentures.
A brokerage contract is different from an underwriting contract. A broker undertakes only to find buyers who are willing to buy shares and debentures and does not guarantee the sale of a specified number of securities (shares, debentures). Thus, if shares and debentures could not be sold by the company, the broker will not buy the securities which have not been subscribed for.
| On amounts devolving on the underwriters (percent) | On amounts subscribed by the public (percent) | |
| (a) Equity Shares | 2.5 | 2.5 |
| (b) Preference Shares/Convertible | ||
| (i) For amounts upto Rs. 5 lakhs | 2.5 | 1.5 |
| (ii) For amounts in excess of Rs. 5 lakhs | 2 | 2 |
Notes:
(i) The rates of under-writing commission given above are the maximum. The company is free to negotiate such rates with the under-writers, subject to the ceiling.
(ii) Under-writing commission will not be payable on amounts taken up by the promoters group, employees, directors, their friends and business associates.
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