Allotment

August 31, 2024 Corporate Finance

Allotment is the assignment of a specified number of offered securities to an applicant after subscription and allocation rules are applied.

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Allotment is the assignment of a specified number of offered securities to an applicant or subscriber. It occurs after valid applications, payments, eligibility checks, and allocation rules are applied. The allotment may equal the amount requested, be reduced, or be zero.

In company-law usage, allotment can also refer to the corporate act that creates or appropriates new shares to a person. The precise legal point at which ownership rights arise depends on the jurisdiction, governing documents, and registration process.

Key Takeaways

An application or order is a request; an allotment is the amount assigned.
Oversubscribed offerings require an allocation method and may scale requests down.
Basic rights entitlements and oversubscription requests are usually calculated separately.
Payment for more shares than allotted should be refunded or otherwise handled under the offering terms.
Allotment does not guarantee immediate trading, liquidity, price appreciation, or final settlement.

Worked Example

Assume a rights offering makes 25 million new shares available at $8:

Valid basic subscriptions: 20 million shares
Shares left after basic subscriptions: 25 million - 20 million = 5 million
Valid oversubscription requests: 8 million shares

If the documents use simple pro-rata allocation based on excess shares requested, the oversubscription allocation rate is:

5 million / 8 million = 62.5%

A holder with a basic entitlement to 100 shares exercises it in full and requests 60 extra shares:

Basic allotment: 100 shares
Provisional extra allotment: 60 x 62.5% = 37.5 shares
Total before rounding: 137.5 shares

The final number may be 137 or 138, or follow another adjustment, because fractional-share and rounding rules are stated in the offering documents. If the holder prepaid for all 60 extra shares, the unused payment for 22 or 23 shares must be returned or otherwise processed under those terms.

Common Allotment Methods

Method	How it works	Where caution is needed
Full allotment	Every valid request is met	Only possible when sufficient securities are available
Pro rata	Available securities are divided by a stated proportional base	The base may be shares requested, shares owned, or basic rights exercised
Discretionary	Issuer or managers allocate using permitted criteria	Criteria, conflicts, and concentration matter
Category-based	Separate pools exist for retail, institutional, employee, or other applicants	One pool can be oversubscribed while another is not
Random or ballot	Qualifying applications are selected under stated rules	Often combined with minimum lots or caps
Priority-based	Certain eligible applications receive priority	Priority must follow the transaction rules

No single method is universally “fair.” The relevant question is whether the disclosed method was applied consistently and lawfully to valid applications.

The Allotment Process

Applications, elections, and funds are received before the deadline.
The subscription agent validates eligibility, signatures, payment, and quantity.
Basic entitlements or priority applications are processed.
Remaining securities are calculated.
Excess or general applications are reduced under the allocation method.
Fractional and minimum-lot rules are applied.
Applicants receive confirmation, securities, and any required refund.
The issuer updates ownership records and announces the result where required.

How to Review an Allotment

Compare securities offered, valid demand, rejected applications, and final allotments.
Identify the allocation base and reproduce the proration calculation.
Check treatment of connected parties, controlling shareholders, and underwriters.
Reconcile cash received with allotted securities and refunds.
Verify the difference between allotment date, settlement date, registration, and admission to trading.
Read caps, minimum lots, fractions, oversubscription, and scale-back provisions.

Risks and Common Mistakes

An investor may commit cash without receiving the requested amount and may wait for excess funds to be returned. Operational errors, missed instructions, ineligible accounts, failed payment, or settlement problems can reduce or cancel an allotment.

Do not treat an application as ownership, assume all oversubscription is prorated the same way, or describe allotment as a guarantee that the security will trade profitably. This page is educational and not legal or investment advice.

Over-Subscription: Valid demand exceeding offered supply.
Oversubscription Privilege: A request for shares left after basic rights are exercised.
Rights Issue: A proportional offer of new shares to existing holders.
Unsubscribed Shares: Shares not taken up through basic subscriptions.
Pro-Rata Allocation: An allocation based on a defined proportional measure.

FAQs

Is an application the same as an allotment?

No. An application requests securities. The allotment is the final amount assigned after eligibility and allocation rules are applied.

What happens when an applicant receives fewer shares than requested?

The applicant pays only for the final allotment, and excess prepaid funds are returned or handled as the offering documents specify.

Can a private company allot shares?

Yes. Public trading is not required for an allotment, but approvals, contracts, corporate records, securities laws, and registration requirements depend on the company and jurisdiction.

Nil-Paid Shares