The three steps for determining the liability of underwriters are:
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3 Steps
i) Complete Underwriting:
If the whole issue of shares or debentures is underwritten only by one underwriter, the Underwriter in such a case will be liable to take up all the shares or debentures that have not been subscribed by the public. It is not material in such a case whether the applications have come through the underwriter or directly to the company. The liability of the underwriter will be determined by deducting the total applications received from the shares or debentures offered to the public. If the shares are oversubscribed or fully subscribed the underwriter is free from his liability but he will be entitled to get his commission on the total issue price of the shares or debentures. But he has to take the shares or debentures under firm underwriting.
ADVERTISEMENTS:
ii) Partial Underwriting:
If a part of the issue of shares or debentures is underwritten only by one underwriter then In such a case only a part (say 70% or 80%) of the issue of shares or debentures is underwritten only by one underwriter and the balance (i.e 30% or 20%) of the issue is concerned, the company itself is said to have underwritten the same. All unmarked applications are treated as marked applications as far as the company is concerned. The net liability will be calculated by deducting the marked applications from the gross liability (say 70% or 80%). If the marked applications exceed or equal to the number of shares or debentures underwritten, the underwriter is free from his liability and cannot be called upon to take up any shares or debentures of the company. Similarly if all liability inspite of the fact that marked applications are less than number of shares or debentures underwritten.
iii) Firm Underwriting :
Firm underwriting means when an underwriter agrees to buy a definite number of shares or debentures in addition to the shares or debentures, he has to take under the under writing agreement. In case of firm underwriting the underwriters get priority over the general public, if shares or debentures are oversubscribed.