Allotment of shares refers to the distribution of shares among the shareholders who applied for the shares or submitted written application for the allotment of shares. As soon as the company receives the applications for shares issued by means of prospectus, it starts allotting shares on preset basis.
In case, the applications exceed the available shares, allotment is made on proportional basis. Allotment of shares is one of the best ways available for a company if it is looking to raise new finance. Moreover, a company is free to issue shares to both individuals or corporate establishments.
Scenarios that Lead to the Allotment of Shares by a Company
- When the company is established or incorporated
- To repay the company’s borrowings
- To flourish the business
- To fund a project or development
- To acquire or purchase another entity
- To improve the balance sheet of a company
- To capitalise issue of shares or provide bonus to the shareholders
The Companies Act, 2013 states that there are two ways by which a company can raise its funds. It can be done through the private placement of shares and right issue of shares. It is important to know that a private company can either issue shares to its existing or current shareholders by the method of rights issue or provide them bonus shares.
The first method of allotting shares i.e. private placement of shares implies the sale of securities to a small group of selected investors with the purpose of increasing capital. Usually, mutual funds, banks, pension funds and insurance companies invest in the private placement of shares. It has to be taken care that during the private placement of shares, the invitation to subscribe securities should not be made to more than two hundred persons in aggregate in a financial year.
The second method of allotting shares i.e. Right issue of shares refers to the issue of rights to the existing shareholders of the company. It allows them to buy additional shares directly from the company in proportion to their current holdings, within a set period of time. Under right issue of shares, a company can issue shares on preferential basis and can also issue sweat equity shares. Sweat Equity Shares refers to the equity shares, issued by a company to its employees or directors at discount or for consideration, other than cash.