## Underwriting Commission

Underwriting is the arrangement by which an underwriter (usually a financial institution or merchant banker) undertakes to subscribe to the unsubscribed portion of an issue of securities. In return, the underwriter receives a commission.

### Conditions for payment of Underwriting Commission

#### (a) Authorisation by Articles

The payment of commission must be authorised by the Articles of Association of the company.

#### (b) Maximum Rate of Commission

Type of Security	Maximum Rate
Shares	5% of price at which shares are issued OR rate authorised by Articles — whichever is LESS
Debentures	2.5% of price at which debentures are issued OR rate as per Articles — whichever is LESS

#### (c) Not payable on non-public securities

Underwriting commission shall NOT be paid on those securities which are not offered to the public for subscription.

#### (d) Source of payment

Commission may be paid out of:

Proceeds of the issue, or
Profits of the company, or
Both.

#### (e) Disclosure in Prospectus

The name of the underwriter and the rate of commission must be disclosed in the prospectus.

#### (f) Number of Securities Underwritten

The prospectus must indicate the number of securities/debentures underwritten.

#### (g) Filing with Registrar

A copy of the underwriting agreement must be delivered to the Registrar along with the prospectus.

Worked example

### Example 1

Example 1 (Shares): A company issues equity shares at ₹100 each. Articles authorise underwriting commission of 4%. The maximum permissible commission is LOWER of 5% (statutory) or 4% (articles) = 4%, i.e., ₹4 per share.

### Example 2

Example 2 (Debentures): A company issues debentures at ₹1,000 each. Articles authorise underwriting commission of 3%. The maximum permissible commission is LOWER of 2.5% (statutory) or 3% (articles) = 2.5%, i.e., ₹25 per debenture.

### Example 3

Example 3 (Private placement): XYZ Ltd. makes a private placement of debentures. No underwriting commission is payable as the securities are not offered to the public.

⚠️ Common exam mistakes

Applying 5% rate to debentures — the rate for debentures is 2.5%, not 5%.
Using the HIGHER of statutory rate / Articles rate — always the LOWER (whichever is less).
Forgetting that commission cannot be paid on securities issued to private persons (not offered to public).
Failing to file the underwriting agreement with the Registrar along with the prospectus.

Reference: Section 40(6) — The Companies Act, 2013 read with Companies (Prospectus and Allotment of Securities) Rules, 2014

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