Allotment of Shares: Meaning and Examples

An allotment of shares occurs when a company distributes its shares to applicants after an IPO. It's a crucial step in raising capital, determining the company's paid-up and subscribed capital based on investor demand and regulatory compliance. Let's understand the concept of allotment of shares in detail. 

Ever wondered how a startup leaps the Indian market? Consider TechSavvy, with an authorized capital of ₹50 crores, deciding to issue shares worth ₹10 crores through an IPO to spur its expansion. Upon announcing the IPO, they're overwhelmed with applications totalling ₹20 crores, showing immense investor interest. 

Subsequently, they allot shares proportionately, elevating their paid-up capital to ₹10 crores, which mirrors the subscribed capital. This strategic step not only garners essential funds but also broadens its investor community, signifying a crucial growth milestone in the Indian business landscape. 

Explore: Online Stock Market Courses and Certifications

Table of Content

• What is Allotment of Shares?
• Example of Allotment of Shares
• Types of Allotment of Shares
• Process of Allotment of Shares
• Importance of Allotment of Shares

What is Allotment of Shares?

Allotment of shares refers to the process of allocating shares to the shareholders who have applied for them. When a company issues new shares, it invites applications from the public or existing shareholders. Once the company receives the applications, it processes them and decides on the allotment of shares. 

The allotment process involves assigning a specific number of shares to each shareholder based on the number of shares they have applied for and available for allotment. Once the shares are allotted, the shareholders become the company owners to the extent of the shares allotted to them.

Example of Allotment of Shares

Consider a scenario where our company issues 100,000 new shares to raise capital. After advertising the share issue, we receive applications for 150,000 shares. Based on allocation criteria, a company decides to allot shares proportionally. An investor applying for 2,000 shares might receive 1,333 (2,000 shares requested / 150,000 total requested shares * 100,000 shares available). This process ensures a fair distribution among all applicants.

Types of Allotment of Shares

Yes, there are four main types of share allotment: right issue, private placement, public placement, and preferential allotment. Let me explain each of them briefly.

Right Issue: The right issue refers to the process of offering shares to existing shareholders of a company in proportion to their existing shareholding. This means existing shareholders are given the right to purchase additional shares at a discounted price.

Companies typically use the right issues to raise capital from existing shareholders without diluting their ownership.

Private placement: Private placement involves selling shares to a select group of investors, such as institutional investors, high-net-worth individuals, or existing shareholders. 

Companies typically use private placement to raise capital quickly and efficiently without needing a lengthy and expensive public offering. Private placement can also help companies maintain control over their ownership and management.

Public placement: Public placement involves selling shares to the general public through an initial public offering (IPO) or a follow-on public offering (FPO). It requires companies to comply with various regulatory requirements, such as filing a prospectus with the Securities and 

Exchange Board of India (SEBI) and obtaining necessary approvals. Public placement can help companies raise significant amounts of capital and increase their visibility and credibility in the market.

Preferential allotment: Preferential allotment involves the allotment of shares to a select group of investors, such as promoters, directors, or other close to the company persons. 

Companies typically use preferential allotment to raise capital from a select group of investors who can bring strategic value to the company, such as expertise or connections.

Process of Allotment of Shares

The process of allotment of shares typically involves the following steps:

• Announcing the issue details: The company issuing the shares will announce the details, including the number of shares being offered, the price per share, and any other terms and conditions.
• Inviting applications: Potential investors or current shareholders can apply for these shares by submitting an application form and the necessary payment.
• Processing of applications: Once the application process is closed, the company will process the applications and determine the allotment of shares. This involves verifying the applicants' eligibility, checking for any oversubscription or undersubscription, and allocating the shares based on the number of shares applied for and the availability of shares.
• Preparing the allotment list: The company will then prepare an allotment list specifying the number of shares allotted to each applicant.
• Issuing share certificates or demat statements: After the allotment list is finalized, the company will issue share certificates or demat statements to the shareholders who have been allotted shares. These certificates or statements serve as proof of ownership and can be used to trade the shares on the stock exchange or transfer ownership to another person.

Importance of Allotment of Shares

• Allotment of shares is important for companies to raise capital for growth and expansion plans.
• It helps to increase the visibility and credibility of the company in the market.
• Shareholders can invest in the company's future and share in its profits.
• The company's ownership structure is determined by the number of shares allotted to each shareholder, which can impact decision-making.
• The allotment process is governed by regulations and guidelines that ensure transparency and fairness when issuing shares.
• Allotment of shares is an important step in a company's growth and development. It helps the company raise capital, expand its operations, and benefit both the company and its shareholders. 

Conclusion

Allotting shares is crucial in a company's growth and financing strategy. It involves distributing shares to investors or stakeholders, impacting ownership structure and capital flow. Properly managing share allotment ensures effective capital raising, aligns shareholder interests, and supports the company's financial health and strategic objectives.