Types
- Initial Public Offering (IPO) Allotment: Occurs when a company goes public for the first time, offering shares to institutional and retail investors.
- Rights Issue Allotment: Involves offering additional shares to existing shareholders, usually at a discount.
- Bonus Issue Allotment: Issuing additional shares to existing shareholders from the company’s reserves, essentially as a dividend.
- Employee Stock Option Plan (ESOP) Allotment: Shares allotted to employees as part of their compensation and incentives.
Detailed Explanations
An allotment is essentially a promise of a certain number of shares to an investor, formalized through a letter of allotment. This letter grants the investor a legal right to be registered as a shareholder.
Process of Allotment:
- Issuance of Prospectus: The company publishes details of the share issue.
- Application Submission: Potential investors submit applications along with payment.
- Allotment Decision: The company reviews applications and decides on the allotment.
- Letter of Allotment: Investors receive a document confirming their allotted shares.
- Entry in Register of Members: Investors are formally registered as shareholders.
Importance
The allotment process is crucial for:
- Raising Capital: It helps companies garner necessary funds to finance projects, expansions, or operations.
- Investor Diversification: Provides opportunities for investors to diversify their portfolios.
- Market Fluidity: Facilitates the flow of capital within the financial market.
- Prospectus: A formal document detailing the investment offering.
- Over-Subscription: When demand for shares exceeds the supply offered.
- Flotation: The process of making a company’s shares available for public trading.
- Register of Members: The official record of shareholders in a company.
FAQs
What is the purpose of allotment in shares?
Allotment helps companies raise capital and allows investors to become shareholders.
What happens during an over-subscription?
The company must decide on a fair allocation method, often proportional.
Can allotment occur in private companies?
Yes, private companies can also allot shares, usually in a rights issue or private placement.