Definition of Allotment
Allotment refers to the process by which a company distributes newly issued shares to investors in exchange for capital. This often occurs after a prospectus is issued during important corporate events such as the initial public offering (IPO) of a public company or the privatization of a state-owned industry.
When an investor applies for shares based on the company’s prospectus, the company dispatches a “letter of allotment” to confirm how many shares have been assigned to that investor. The applicant then has an unconditional right to be entered in the company’s register of members for the allotted shares.
In cases where the demand for shares exceeds the available supply (oversubscription), shares are typically distributed through a random draw or via proportional allocation. Applicants who receive fewer shares than they applied for will be refunded the unallotted balance.
Examples
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Initial Public Offering (IPO):
- When a company moves from private to public ownership, it issues a prospectus detailing how many shares it will offer to the public. Interested investors apply for these shares, and the company allots shares to those applicants based on the demand and investment amount.
-
Privatization of a State-Owned Industry:
- A government-owned enterprise undergoing privatization may issue shares to the public. Investors apply for these shares, and the government/company allocates shares accordingly.
Frequently Asked Questions
What is a letter of allotment?
A letter of allotment is a document sent by a company to applicants of its shares, informing them about the number of shares allotted to them.
How does allotment occur in the case of oversubscription?
When oversubscription happens, shares can be allotted either by a random draw (lottery system) or through proportional allocation, where each applicant receives a portion of their requested shares.
What happens if I receive fewer shares than I applied for?
Applicants who receive fewer shares than they applied for will receive a refund for the unallotted portion of their application.
Is the application for shares always accompanied by payment?
Yes, an application to purchase shares usually requires a payment equal to the full value of the shares applied for to ensure serious intent by the investor.
The allotted share information is recorded in the company’s register of members, which serves as an official record of share ownership.
- Flotation: The process through which a company goes public by issuing shares to the general public.
- Prospectus: A formal document issued by a company detailing the terms and conditions of a share/general public offer.
- Register of Members: An official record maintained by a company which lists the holders of its shares and other securities.
Online Resources
Suggested Books for Further Studies
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen.
- “Corporate Finance: Core Principles and Applications” by Stephen A. Ross, Randolph W. Westerfield, and Jeffrey Jaffe.
- “Financial Management: Theory and Practice” by Eugene F. Brigham and Michael C. Ehrhardt.
Accounting Basics: Allotment Fundamentals Quiz
### What is the primary purpose of an allotment process?
- [ ] To evaluate company performance.
- [ ] To merge two companies.
- [x] To distribute newly issued shares.
- [ ] To calculate taxes.
> **Explanation:** The allotment process is primarily used to distribute newly issued shares to investors in exchange for capital.
### When is a letter of allotment issued?
- [ ] After the shares have been sold on the open market.
- [x] After an application for shares is accepted.
- [ ] Before an IPO announcement.
- [ ] During the end-of-year financial review.
> **Explanation:** A letter of allotment is issued after the company accepts an application for shares, confirming how many shares have been allotted.
### What happens during an oversubscription of shares?
- [x] Shares are either allocated via lottery or proportionally.
- [ ] No shares are allotted.
- [ ] Shares are given equally to all applicants.
- [ ] The shares are withdrawn from the market.
> **Explanation:** In case of oversubscription, shares are typically distributed through a random draw (lottery) or by proportional allocation based on demand.
### Which document should investors look for to understand the terms of a share issuance?
- [ ] Financial statement.
- [x] Prospectus.
- [ ] Trial balance.
- [ ] Payroll register.
> **Explanation:** Investors should refer to the prospectus to thoroughly understand the terms and conditions of the share issuance.
### What does the register of members track?
- [x] The party holding shares and other securities.
- [ ] The company's pending payments.
- [ ] Employee performance.
- [ ] Company budget allocations.
> **Explanation:** The register of members records the names and details of all individuals or entities holding the company’s shares and other securities.
### Which entity often undergoes a privatization process involving share allotment?
- [ ] Private non-profit organizations.
- [x] State-owned industries.
- [ ] Sole proprietorships.
- [ ] Small, local companies.
> **Explanation:** State-owned industries may undergo privatization, offering shares to the public, which involves an allotment process.
### When are applicants entitled to an unconditional right to be entered in the company's register of members?
- [ ] Upon submitting an application.
- [x] Upon receiving the letter of allotment.
- [ ] After trading shares on the open market.
- [ ] After the company's annual general meeting.
> **Explanation:** Applicants are provided an unconditional right to be entered in the company's register of members upon receiving the allotment of shares in the letter of allotment.
### If the number of shares applied for exceeds the number available, what usually happens?
- [ ] The shares are withdrawn.
- [x] A lottery or proportional allocation occurs.
- [ ] New shares are issued.
- [ ] The application is canceled.
> **Explanation:** If there are more applications than available shares, a random draw or proportional allocation method is used to distribute shares among applicants.
### What must accompany an application for shares?
- [x] A cheque for the full value of the shares applied for.
- [ ] An audit report.
- [ ] A company prospectus.
- [ ] A shareholders' agreement.
> **Explanation:** An application for shares must typically be accompanied by a cheque for the full value of the shares applied for to confirm the applicant’s serious intent.
### Where can investors find detailed information about a company's share issuance process?
- [ ] In the company's annual report.
- [x] In the company's prospectus.
- [ ] On the company's website homepage.
- [ ] Within the company's income statement.
> **Explanation:** Detailed information regarding share issuance can be found in the company’s prospectus, which provides essential details and terms.
Thank you for exploring the intricate concepts of allotment in the field of accounting. Your journey towards financial acumen and expertise is invaluable—keep striving for excellence in your financial education!
