# Underwriting Commission

When a company issues securities to the public, it often appoints underwriters who undertake to subscribe to securities not taken up by the public. In return, they receive an underwriting commission.

## Conditions for Payment of Underwriting Commission

### (a) Authorization by Articles

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

### (b) Maximum Rate of Commission

Type of Security	Maximum Rate
Shares	5% of the price at which shares are issued, OR a rate authorised by the Articles, whichever is less
Debentures	2.5% of the price at which debentures are issued, OR a rate specified in the 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 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 should also indicate the number of securities or debentures which have been underwritten.

### (g) Copy to Registrar

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

Worked example

### Example 1

Example 1: A company issues shares at Rs. 110 per share (face value Rs. 100, premium Rs. 10). The Articles authorize 4% commission. Maximum commission payable = lower of (5% of Rs. 110 = Rs. 5.50) and (4% of Rs. 110 = Rs. 4.40) = Rs. 4.40 per share.

### Example 2

Example 2: A company issues debentures at Rs. 100 each. Articles authorize 3% commission. Maximum commission = lower of (2.5% of Rs. 100 = Rs. 2.50) and (3% of Rs. 100 = Rs. 3) = Rs. 2.50 per debenture.

### Example 3

Example 3: A company allots 1 lakh shares to existing shareholders by way of rights issue (not a public offer). No underwriting commission can be paid in respect of these shares.

⚠️ Common exam mistakes

Forgetting to compare BOTH the statutory cap AND the Articles' rate - the lower of the two prevails.
Applying the 5% rate to debentures - debentures have a SEPARATE cap of 2.5%.
Paying underwriting commission on securities not offered to the public - this is NOT permitted.
Omitting to disclose the underwriter's name and commission rate in the prospectus.
Not filing the underwriting agreement with the Registrar along with the prospectus.

Reference: — The Companies Act, 2013

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