Q.13 Defines underwriting commission and its conditions?
Am: UNDERWRITING COMMISSION
The Section 82 of the Ordinance allows the company to contract with any person or institution to work as an agent of the company for the sale of its shares. The company pays commission as reward for his services. This commission is known as underwriting commission. The person who is appointed as underwriting Agent takes the responsibility for the sale of a specific number of shares. If the general public does not purchase these shares, then he is bound to purchase himself. So the shares are given to him at price less than the value at which the share is offered to the general public. The difference between the issue price and price at which share is offered to the underwriting is known as underwriting commission.
CONDITIONS FOR UNDER WRITING COMMISSION
The following are two conditions for the payment of underwriting commission.
(i) The rate of commission must being in accordance with the articles of association.
(ii) The rare of commission and its payment has seen declared in prospectus if the shares are offered to the general public.
ISSUE PRICE OF SHARE
As already started, chat total capital of the company is divided into a number of small units of nominal value and each unit is known as share. The value given to each share is known as par value or face value. According to Companies Ordinance, the share may be sold (issued) at par value or a premium or at discount.
1. At Par Value
If the company sells its share at the registered, nominal or at actual value then it is known that share has been issued at par or at face value. For example, the capital of the company is Rs. 1,00,000 and it has been divided into 10,000 shares of Rs. 10 each and these share are also sold for Rs. 10 each. It will be known that shares have been issued at par.
2. At Premium
If the company sells its shares at a price higher than its value then it is known that share has been issued at premium. According to Section 83 of the Companies Ordinance, this premium can be used for writing off the preliminary expenses of the company, underwriting commission, discount on Issue of share or debentures and for the redemption of preference share of debenture and for the issuance of the bonus shares.
3. At Discount
If the company sells its shares at a price lesser than its face value then it is known that shares have been issued at discount? According to Companies Ordinance (Section 84), the company sells its shares at discount if the following conditions are met.
If the resolution has been passed in the general meeting of the company and sanctioned by the authorities for the issuance of shares at discount. The maximum rate cannot exceed than ten percent.
One year or more time has passed since the date of commencement of the business of company.
These shares must be issued with in the sixty days of the sanctioned date.
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