Updated on March 1, 2023
Raising capital through a public issue i.e., an IPO can involve various charges. One such is the underwriting commission.
Underwriters are one of the key intermediaries in any IPO. They are the risk takers of the IPO in case it is undersubscribed as they can take up the shares or debentures that remain unsubscribed in the issue. For these services, underwriters charge underwriting commission to the issuing company.
As per the provisions of the Companies Act, underwriting commission is paid to an individual underwriter or any eligible entity for subscribing or procurement of subscription to its securities, whether absolute or conditional, subject to fulfillment of the prescribed conditions under the underwriting contract.
Rules on Underwriting Commission as per Companies Act
Some of the rules laid out by the Companies Act on underwriting commission are:
a. This payment has to be authorised by the articles of association.
b. The commission may be paid out of the proceeds of the issue or from the company profits or both as per the contract.
c. The commission rate must be lower of 5% of the price at which shares are issued or the rate that is authorised under the articles.
d. In case of the issue of debentures, the commission rate must be lower of 2.5% of the price of issue or the rate that is authorised under the articles.