UNDERWRITING AND BROKERAGE AGREEMENTS
(I) Underwriting agreements-The object of
underwriting is to insure against the risk that shares, debentures or debenture
stock offered by a
company for subscription may not be taken up. For floatation of share/debenture
capital, a company is generally
required to have the public
issue fully underwritten to
insure that all the shares and debentures are
taken up by the investor and
thus the required capital
is raised. The underwritten
provides an assurance against the
risk of undersubscription .
(a) Payment of commission to underwriter .-
The underwriters are entitled to commission. Section 76 of the Companies Act,
1956, provides as follows :
“76 (1). A company may pay a commission to any person in consideration of-
(a) his subscribing or agreeing to subscribe,
whether absolutely or conditionally for any shares in, or debentures of, the
company, or
(b) his procuring or agreeing to procure subscription, whether absolute
or conditional for any shares in or
debentures of, the company,
If the following condition are
fulfilled, namely :-
i) the payment of the commission is authorised by the articles ;
ii) the commission paid or agreed to be paid does not exceed in case of shares five per
cent of the price at which the shares are issued or the
amount or rate authorised by the
articles, whichever is less, and in the
case of debentures, two and a half per cent of the price at which the
debentures are issued for the amount or rate authorised by the articles,
whichever is less :
iii) the amount or rate percent of the commission paid or
agreed to be paid is-
(a) in case of shares or debentures offered
to the public for subscription, disclosed in the prospectus; and
(b) in the case of shares or debentures not
offered to the public for subscription, disclosed in the statement in lieu of
prospectus, or in a statement in the prescribed form signed in like manner as
a statement in lieu of prospectus and filed
before the payment of the commission with the Registrar and where a circular
or notice, not being a prospectus inviting subscription for the share
or debentures, is issued, also disclosed in that circular or
notice ;
iv) the number of shares or debentures which
persons have agreed for a commission of subscribe absolutely or conditionally
is disclosed in the manner aforesaid; and
v) a copy of the contract for the payment
of the commission is delivered to the Registrar at the time of delivery of the
prospectus or the statement in lieu of prospectus for registration.
2) Save as aforesaid and save as provided
in section 78, no company shall allot
any of its shares or debentures or apply any of its moneys, either directly or
indirectly in payment of any commission, discount or allowance, to any
person in consideration of-
a) his subscribing or agreeing to subscribe, whether absolutely
or conditionally, for any shares in, or debentures of, the company; or
b) his procuring or agreeing to procure
subscription, whether absolute or
conditional, for any shares in, or debentures of, the company whether the shares, debentures or money be so
allotted or applied by being added to the purchase money of any property acquired by the company or to the contract price of
any work
to be executed for the company,
or the money be paid out the nominal
purchase money or contract price, or otherwise.
3) Nothing in this section shall affect
the power of any company to pay such brokerage
as it has heretofore been lawful
for a company to pay.
4) A vender to, promoter of, or other
person who receives payment in shares, debentures or money from, a company
shall have and shall be deemed always to have
had power to apply for any part of the shares, debentures or money so received in payment of any commission the payment of
which, if made directly by the company, would
have been legal under this section.
(4-A) For the removal of doubts it is hereby declared that no commission shall be paid under clause (a)
of sub-section (1) to any person on shares or debenture which are not offered to the public for
subscription :
Provided that where a person has
subscribed or agreed to subscribes under
clause (a) of sub-section (1) for any shares in, or debentures of, the
company and before the issue of the
prospectus or statement in lieu thereof any other person or persons has or have subscribed for any or all of those shares or
debentures and that fact together
with the aggregate amount of commission payable under this section in respect of such subscription
is disclosed in such prospectus
or statement, then the company may pay commission to the first mentioned person in respect of
such subscription.
5) If default is made in complying with
the provisions of this section, the company, and every officer of the company
who is in default, shall be punishable with fine which may extend to five
hundred rupees.”
LETTER OF ACCEPTANCE
To
……………….
Dear Sir,
With reference to your application dated………….we accept and
admit you as an underwriter of………………ordinary shares of our company at commission
of…………….per cent, upon the footing and subject to the conditions
contained in your application.
Yours, etc.
……………
DISCLAIMER: THE ARTICLE IS BASED ON THE RELEVANT
PROVISIONS AND AS PER THE INFORMATION EXISTING AT THE TIME OF THE PREPARATION.
IN NO EVENT I SHALL BE LIABLE FOR ANY DIRECT AND INDIRECT RESULT FROM THIS
ARTICLE. THIS IS ONLY A KNOWLEDGE SHARING INITIATIVE.
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