Allotment vs. Issue of Shares

Attribute	Allotment	Issue of Shares
Definition	The process of allocating shares to specific individuals or entities.	The act of offering and distributing shares to the public or existing shareholders.
Authority	Decided by the company's board of directors.	Decided by the company's board of directors and approved by shareholders.
Timing	Can occur at any time after the company's formation.	Usually occurs during the initial public offering (IPO) or subsequent fundraising rounds.
Number of Shares	Can be a specific number or a percentage of the company's authorized share capital.	Usually a specific number of shares.
Price	Shares can be allotted at par value or at a premium.	Shares can be issued at par value, at a premium, or at a discount.
Eligibility	Shares can be allotted to existing shareholders, employees, or specific individuals/entities.	Shares can be issued to the public, existing shareholders, employees, or specific individuals/entities.
Legal Requirements	May require filing of allotment details with the relevant regulatory authorities.	May require filing of prospectus or offering circular with the relevant regulatory authorities.

Introduction

When it comes to raising capital for a company, issuing shares is a common practice. However, the process of issuing shares involves two distinct steps: allotment and issue. While these terms are often used interchangeably, they have different meanings and implications. In this article, we will explore the attributes of allotment and issue of shares, highlighting their differences and importance in the context of corporate finance.

Allotment of Shares

Allotment of shares refers to the process of allocating shares to specific individuals or entities. It is the initial step in the issuance of shares and involves the company deciding who will receive the shares. The allotment process typically occurs after the company has received applications for shares through a public offering or private placement.

During the allotment process, the company's board of directors or a designated committee reviews the applications and determines the number of shares to be allocated to each applicant. This decision is based on various factors, including the amount of capital the company aims to raise, the demand for shares, and any regulatory requirements.

Once the shares are allotted, the company enters into an agreement with the allottees, specifying the number of shares allocated, the price per share, and any other relevant terms and conditions. The allottees are then legally bound to purchase the allotted shares within a specified timeframe.

It is important to note that the allotment of shares does not involve the actual transfer of ownership. Instead, it represents a commitment to issue shares to the allottees upon completion of the subsequent step, which is the issue of shares.

Issue of Shares

The issue of shares is the final step in the process of raising capital through share issuance. It involves the actual transfer of ownership from the company to the shareholders. Once the shares are issued, the shareholders become the legal owners of the allotted shares, and the company receives the corresponding capital.

The issue of shares can occur in various ways, depending on the company's needs and the applicable regulations. It can be done through a physical share certificate, electronic transfer, or a combination of both. The company must comply with the legal requirements and follow the necessary procedures to ensure a valid and legally binding share issue.

When issuing shares, the company may also need to consider any pre-emptive rights held by existing shareholders. Pre-emptive rights give existing shareholders the opportunity to purchase additional shares in proportion to their existing holdings before the shares are offered to new investors. This ensures that existing shareholders are not diluted by the issuance of new shares.

Once the shares are issued, the company updates its share register to reflect the new shareholders and the number of shares they hold. The shareholders are entitled to the rights and benefits associated with share ownership, such as voting rights, dividends, and the ability to participate in the company's decision-making process.

Key Differences

While allotment and issue of shares are interconnected steps in the process of share issuance, they have distinct attributes and implications. Here are some key differences between the two:

• Allotment is the allocation of shares to specific individuals or entities, while the issue of shares is the actual transfer of ownership from the company to the shareholders.
• Allotment occurs before the issue of shares and represents a commitment to issue shares, whereas the issue of shares finalizes the share transfer and grants ownership rights to the shareholders.
• Allotment involves the decision-making process of determining the number of shares to be allocated to each applicant, while the issue of shares focuses on the legal and procedural aspects of transferring ownership.
• Allotment is based on factors such as capital requirements and demand for shares, while the issue of shares requires compliance with legal requirements and procedures.
• Allotment does not result in immediate ownership, while the issue of shares grants full ownership rights to the shareholders.

Importance in Corporate Finance

The process of allotment and issue of shares plays a crucial role in corporate finance. It allows companies to raise capital for various purposes, such as funding expansion plans, financing acquisitions, or strengthening their financial position.

Allotment of shares enables companies to carefully select the investors or entities that will become shareholders. This allows companies to align their shareholder base with their strategic objectives and ensure that the shareholders bring value beyond just capital. By choosing the right allottees, companies can benefit from their expertise, network, and industry knowledge.

The issue of shares, on the other hand, provides companies with the necessary funds to execute their growth plans. It allows them to tap into the financial resources of the shareholders and leverage their capital for business activities. The issue of shares also enhances the company's financial position, as it increases the equity base and improves the debt-to-equity ratio.

Furthermore, the process of issuing shares can have a significant impact on the company's valuation and market perception. A successful share issue can boost investor confidence, attract new investors, and potentially increase the company's stock price. Conversely, a poorly executed share issue can lead to dilution of existing shareholders, negative market sentiment, and a decline in the company's stock price.

Conclusion

Allotment and issue of shares are two essential steps in the process of raising capital through share issuance. While allotment involves the allocation of shares to specific individuals or entities, the issue of shares represents the actual transfer of ownership. Both steps have distinct attributes and implications, and they play a crucial role in corporate finance by allowing companies to raise capital and strengthen their financial position. Understanding the differences between allotment and issue of shares is essential for companies and investors alike, as it helps ensure a smooth and successful share issuance process.