Allotted Shares

Allotted Shares Shareholders Allotment Capital Raising Issued Share Capital Corporate Finance
Allotted shares are distributed to new shareholders through the process of allotment, forming part of the allotted share capital. They are essential for companies as they raise capital by issuing these shares to investors.
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Definition

Allotted shares refer to the shares of a company that have been distributed to new or existing shareholders through the process known as share allotment. This allocation forms part of the company’s allotted share capital, which represents the amount of money raised through the issuance of shares to investors.

Detailed Explanation

The process of allotment involves the company’s board of directors deciding to issue a certain number of shares to expand the shareholder base or to raise capital for the company’s operations, growth, or other financial needs. The shares are then distributed to investors who subscribe to them. Once the allotment process is complete, these shares become part of the allotted share capital, differentiating them from other categories like authorized share capital or issued share capital.

Steps in Share Allotment:

  1. Board Approval: The board of directors passes a resolution to allot shares.
  2. Application Process: Potential investors submit applications for the purchase of shares.
  3. Allotment Decision: The company decides how many shares to allot to each applicant.
  4. Notification: Allottees are notified of their share allotment.
  5. Share Issuance: Finally, share certificates are issued to the new shareholders.

Examples

  1. Initial Public Offering (IPO): During an IPO, a company may allot shares to the public for the first time. Investors who subscribe to the IPO will receive allotted shares once the process is complete.

  2. Rights Issue: When a company issues new shares to its existing shareholders at a discount, those shareholders can subscribe to these rights. The new shares they receive are considered allotted shares.

  3. Employee Stock Options (ESOPs): Companies may allot shares to employees as an incentive through ESOPs. The shares issued under this plan are allotted shares.

Frequently Asked Questions (FAQs)

Q1: What is the difference between allotted shares and issued shares?

  • A1: Allotted shares refer to the shares that have been distributed to shareholders through the process of allotment. Issued shares include all the shares that have been issued by the company, encompassing allotted shares and other issued shares not necessarily distributed through allotment.

Q2: Can allotted shares be traded immediately?

  • A2: It depends on the terms laid out by the company. In many cases, there might be a lock-in period during which allotted shares cannot be sold or traded.

Q3: Are there any restrictions on the number of shares a company can allot?

  • A3: Yes, the number of shares a company can allot is usually restricted by its authorized share capital, which sets the maximum number of shares the company is allowed to issue.
  • Issued Share Capital: The total value of shares that a company has issued to shareholders. This includes allotted shares.
  • Authorized Share Capital: The maximum amount of share capital that a company is authorized to issue as per its corporate charter.
  • Subscription: The act of investors applying for shares during an allotment process.

Online References

Suggested Books for Further Studies

  • “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
  • “Corporate Finance” by Jonathan Berk and Peter DeMarzo
  • “The Essentials of Corporate Law and Governance” by Thomas B. Courtney

Accounting Basics: “Allotted Shares” Fundamentals Quiz

### What are allotted shares? - [ ] Shares held in reserve by a company. - [x] Shares distributed to shareholders through the process of allotment. - [ ] Shares bought back by the company. - [ ] Shares given as dividends. > **Explanation:** Allotted shares are those distributed to shareholders through the process of allotment, often used to raise capital for the company. ### Which entity usually approves the allotment of shares? - [ ] Shareholders - [x] Board of Directors - [ ] External Auditors - [ ] The Government > **Explanation:** The board of directors typically passes a resolution to approve the allotment of shares. ### In an IPO, what process leads to the distribution of shares to the public? - [x] Allotment - [ ] Buyback - [ ] Dividend distribution - [ ] Loan issuance > **Explanation:** During an IPO (Initial Public Offering), shares are distributed to the public through the process of allotment. ### What document is issued to shareholders after shares are allotted? - [ ] A bond certificate - [ ] An option agreement - [x] A share certificate - [ ] A loan document > **Explanation:** Share certificates are issued to shareholders to signify the ownership of the allotted shares. ### Are allotted shares a part of the authorized share capital? - [ ] Only sometimes - [ ] No, they are separate - [x] Yes, they must be within the authorized share capital - [ ] Only for private companies > **Explanation:** Allotted shares are limited by the authorized share capital, which is the maximum amount the company is allowed to issue. ### During a rights issue, who is eligible to receive allotted shares? - [ ] New investors - [x] Existing shareholders - [ ] Only employees - [ ] Bondholders > **Explanation:** In a rights issue, new shares are allotted to existing shareholders, often at a discount. ### Can allotted shares have restrictions like lock-in periods? - [x] Yes - [ ] No, they are always freely tradable - [ ] Only in a secondary market - [ ] Only for large corporations > **Explanation:** Companies may impose restrictions like lock-in periods where allotted shares cannot be sold or traded immediately. ### Which type of financing does the shares allotment process help in? - [ ] Debt Financing - [ ] Self-Financing - [x] Equity Financing - [ ] Crowdfunding > **Explanation:** Share allotment helps in equity financing as it allows the company to raise capital by issuing shares to investors. ### What happens to the company's share capital after shares are allotted? - [ ] It decreases - [x] It increases - [ ] It remains the same - [ ] It converts into loan capital > **Explanation:** The company's share capital increases as shares are allotted and new capital is raised from investors. ### Who generally provides the terms and conditions for the allotment process? - [x] The company's board of directors - [ ] The government - [ ] The shareholders by vote - [ ] The company's employees > **Explanation:** The board of directors provides the terms and conditions under which shares will be allotted.

Thank you for diving into the intricate world of allotted shares and challenging yourself with our quiz. Keep refining your financial acumen!

Tuesday, August 6, 2024
Allowable Capital Loss
Allotment
Called-up Share Capital January 1, 1
Agreed Bid January 1, 1
Capital Distribution January 1, 1
Equity Finance January 1, 1
Equity Financing January 1, 1
Extra Dividend January 1, 1
Flotation Costs January 1, 1
Issued and Outstanding Shares January 1, 1
Net Dividend January 1, 1
Nil Paid Shares January 1, 1

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