Allotment of Shares – Overview, Reasons, Modes, and Procedure

You might need to change your company’s organizational structure in several cases. You can complete this activity by adding a new stakeholder or changing the current share distribution among the stakeholders. In short, the process by which a company distributes and creates new shares is called an allotment of shares.

A share is a fractional ownership in a business or organization. It is also seen as an asset because you will receive a dividend in proportion to the number of shares you own if the firm generates a profit. Everybody who owns a share in a particular financial asset or company is called a shareholder. 

Meaning of Allotment of Shares

What is meant by ‘allotment of shares’ is simply the corporation’s production and issuance of new shares to the public or current shareholders. It is allocating a specific number of shares to a candidate and distributing them among those who have made a written application. The Companies Act of 2013 and any incorporated regulations control application and dissemination. A shareholder is created by acquiring the authorized shares.

Issuing shares involves distributing ownership interests in a company or other financial assets to shareholders who want to buy them. These shareholders, who participate in purchasing the shares at a set price, may be either people or corporations. Common and preference shares are typically the two types of shares issued. Unlike the latter, this forbids the holders of any rights, and the former allows shareholders to cast votes.

Either new or existing shareholders may receive new shares. Every existing shareholder’s share percentage may be affected by a share allocation. Usually, new shares are distributed to welcome new business partners.

Reasons for allotment of shares 

Financial Needs – Every time the company needs money for a project. It offers shares for subscription to the general public. By issuing shares to the public, the Companies can raise significant amounts of capital without paying high overhead costs and ongoing fees.

Profit capitalization – To avoid undesired takeovers and to avoid increasing the share capital in monetary terms, only a few corporations may choose to issue and distribute bonus shares to enhance their share capital base. Bonus shares are allocated to current owners only against the shares they already own in a set exchange ratio.

Right Shares: A rights issue is a subscription right granted only to the company’s current security holders to purchase new securities. It is a non-dilutive pro rata method of raising capital when the rights are for equity securities, such as shares in a public business. Existing security holders who have the issued rights are entitled to purchase a predetermined number of new securities from the issuer during a subscription period at a predetermined price.

Modes of allotment of shares

The following methods can be used to issue shares:

There are several methods by that a public firm can distribute shares:

• Via a prospectus to the public 
• Utilizing private placement
• By way of a bonus issuance or rights issue

The following are some ways that a private firm can distribute shares:

• Through a rights or bonus issue
• Via preferential allocation or private placement

Procedure for allotment of shares

Step 1: Board Resolution

Initially, the company must have a Board meeting to review and discuss whether it can issue and allocate shares under its Articles of Association (AOA). If not, change the AOA and summon the general meeting for additional share issuance and allocation.

Step 2: Approval of Special or Ordinary Resolution

The company will hold a general meeting of the members and adopt a regular resolution for the continued issuance and allocation of shares in the company’s capital and any necessary amendments to the memorandum of association.

Step 3: Filing of relevant forms

The business must submit Form PAS-3 and Form MGT-14 and any necessary supporting documentation with the Registrar of Companies (ROC) through the MCA portal as soon as the Ordinary Resolution for the Company’s Shares for Future Issue and Allotment is passed.

Step 4: Acceptance of the ROC

If the Registrar of Companies is pleased with the forms filed and the compliance made, he shall process the documents and sanction such issuance and allotment of Shares. When the form is approved, the company’s master data will be updated on the MCA site, and the MCA office will also send an email confirming approval.

Documents required for allotment of shares 

• Copies of the AoA and MoA
• A recent Annual Return copy
• A copy of the new shareholders’ passports.
• A copy of the new shareholders’ proof of residential address
• The Register of Members.

Conclusion

Companies distribute new shares to shareholders through the issue of shares process. Individuals or corporations may be shareholders. While issuing shares, the corporation abides by the laws outlined in the Companies Act of 2013. In light of the previous, allotment of shares essentially amounts to the corporation issuing new shares to the general public, either new or current owners.