Allotment of Shares, Concepts, Meaning, Definitions, Objectives, Procedure, Types, Importance and Challenges

Allotment of shares is the process of formally allocating shares to applicants after receiving their application money. It is the step that converts applicants into legal shareholders of the company. Through allotment, the company finalizes the number of shares each applicant will receive and records their ownership in the Register of Members, giving them the rights and obligations of shareholders as per the Companies Act, 2013 and the company’s Articles of Association.

Meaning of Allotment of Shares

Allotment of shares means the acceptance of an application for shares by a company and the allocation of a specific number of shares to the applicant. It represents the company’s approval and confirmation of subscription. Only after allotment does the applicant acquire ownership rights, including voting, dividends, and participation in assets upon winding up. The allotment is generally documented through a share allotment letter and recorded in statutory registers.

Legal Definitions of Allotment of Shares

• Section 2(1) of the Companies Act, 2013 defines allotment of shares as the acceptance by the company of an application for shares, either in full or part, resulting in the creation of shareholder rights.

• According to Gower’s Principles of Modern Company Law, allotment is “the process by which the company decides who gets what number of shares and under what conditions.”

• Essentially, allotment is the bridge between application and legal ownership of shares.

Objectives of Allotment of Shares

• Conversion of Applicants into Shareholders

The primary objective of allotment of shares is to formally convert applicants into shareholders of the company. Once shares are allotted, the applicant acquires ownership rights, including voting, dividends, and participation in surplus assets upon winding up. This legal recognition ensures that investors’ interests are protected and their claims are formally recorded in the Register of Members, creating a clear ownership structure and enabling participation in corporate governance.

• Legal Recognition of Ownership

Allotment ensures legal recognition of share ownership. Before allotment, applications are merely offers to subscribe. Only after allotment do applicants acquire rights and responsibilities as shareholders. Legal recognition protects the shareholders’ interests and establishes a formal record of capital invested. This recognition is essential for enforcing shareholder rights, receiving dividends, exercising voting powers, and claiming a share in assets in case of liquidation.

• Determination of Shareholding Proportions

Allotment allows the company to determine the proportion of shares for each applicant. In cases of oversubscription, shares may be allotted proportionally to ensure fairness. This objective maintains equity among investors, prevents arbitrary distribution, and ensures that the ownership structure is transparent and compliant with the Articles of Association. Proper allotment balances investor expectations with the company’s capital-raising goals.

• Compliance with Legal and Regulatory Requirements

A critical objective of allotment is to ensure compliance with statutory provisions under the Companies Act, 2013, and SEBI guidelines. Filing of the return of allotment (Form PAS-3) with the Registrar of Companies (RoC) is mandatory. Compliance safeguards the validity of the share issue, protects shareholders’ rights, and prevents penalties or legal disputes. Allotment is therefore both a corporate and legal requirement in capital formation.

• Facilitation of Capital Mobilization

Allotment confirms the capital received from subscribers, enabling the company to utilize funds for business operations, expansion, or strategic projects. By allotting shares, the company secures permanent capital and can plan investments confidently. This objective is vital for corporate growth and ensures that the funds raised through the issue are legally converted into share capital for productive use.

• Protection of Investor Interests

Proper allotment ensures protection of investor interests. Investors receive shares according to their subscription, maintaining transparency and fairness. Rejection or partial allotment is communicated promptly, and application money is refunded if necessary. This objective ensures investor confidence, encourages future investment, and strengthens the company’s reputation for fair dealing, making share issuance more effective and credible.

• Basis for Issuing Share Certificates

Allotment forms the foundation for issuing share certificates, which are legal proof of ownership. Without allotment, certificates cannot be issued, and investors cannot exercise their rights. This objective ensures that the company maintains accurate records of shareholding and statutory registers, enabling shareholders to claim dividends, voting rights, and participation in meetings effectively.

• Transparency and Accountability

Allotment promotes transparency and accountability in the share issuance process. It ensures that shares are allocated according to rules, subscription terms, and investor entitlements. This prevents arbitrary or fraudulent distribution, maintains regulatory compliance, and builds investor trust. Transparency in allotment also strengthens corporate governance by clearly defining ownership patterns and shareholders’ rights, which are critical for effective management and capital market confidence

Procedure for Allotment of Shares

The allotment of shares is the process by which a company formally allocates shares to applicants after subscription. It converts applicants into legal shareholders and ensures compliance with the Companies Act, 2013, Articles of Association, and SEBI regulations (for listed companies). The process involves several steps to maintain fairness, transparency, and legality in share allocation.

Step 1. Board of Directors’ Approval

The first step is obtaining approval from the board of directors. The board reviews:

• Total applications received

• Amount of application money collected

• Compliance with authorized capital limits

• Eligibility of applicants

Board approval ensures that allotment is legally valid and aligns with company policy and statutory provisions.

Step 2. Verification of Applications

The company must scrutinize all applications to confirm:

• Correct completion of forms

• Receipt of proper application money

• Eligibility of applicants under company rules

Defective or incomplete applications are rejected, and money is refunded. Proper verification ensures accuracy and compliance in the allotment process.

Step 3. Minimum Subscription Check

Allotment can only proceed if the minimum subscription (as stated in the prospectus or offer document) is received. If the minimum subscription is not achieved:

• The allotment process cannot proceed

• Collected application money must be refunded to applicants

This step safeguards investor interests and ensures regulatory compliance.

Step 4. Determination of Allotment Basis

If the issue is oversubscribed, the company determines the basis of allotment:

• Proportional Allotment: Each applicant receives shares in proportion to their application

• Lottery Method: Random allocation to meet share limits

• First-Come, First-Served: For small issues

The method must be fair and transparent, often guided by SEBI rules for public issues.

Step 5. Issuance of Allotment Letters

After deciding the number of shares to be allotted:

• Allotment letters are sent to applicants

• Letters indicate number of shares allotted, class of shares, and rights attached

This step formally communicates the outcome and provides proof of allotment to investors.

Step 6. Entry in Register of Members

The company records all allotments in the Register of Members maintained under Section 88 of the Companies Act, 2013:

• Names and addresses of shareholders

• Number and class of shares allotted

• Date of allotment

This step legally recognizes investors as shareholders and establishes ownership.

Step 7. Filing of Return of Allotment with RoC

The company files Form PAS-3 (Return of Allotment) with the Registrar of Companies (RoC) within 30 days of allotment. Filing ensures:

• Statutory compliance

• Official recognition of shareholding

• Updated records with the government

Non-compliance can result in penalties for the company and directors.

Step 8. Issuance of Share Certificates

After allotment, the company issues share certificates to the shareholders:

• Serves as legal proof of ownership

• Required for exercising voting rights and receiving dividends

• Issued within 2 months (private companies) or 4 months (public companies)

Share certificates formalize the investor’s legal rights in the company.

Step 9. Listing on Stock Exchange

For public companies, allotted shares may be listed on a stock exchange after allotment. Listing:

• Provides liquidity to shareholders

• Facilitates secondary market trading

• Enhances company credibility and investor confidence

This step is essential for publicly traded companies seeking active market participation.

Types of Allotment of Shares

Shares can be allotted in different ways depending on the method of issue, investor type, and regulatory compliance. The types of allotment ensure fairness, transparency, and proper capital mobilization. Broadly, the allotment of shares can be classified as follows:

1. Initial Allotment (IPO Allotment)

• This occurs when a company offers shares to the public for the first time through an Initial Public Offering (IPO).

• Investors apply for shares, and allotment is done after verification of applications, subscription money, and regulatory compliance.

• The allotment converts applicants into shareholders and determines their proportionate ownership.

• It is the first step in creating a public shareholder base and raising capital for expansion.

2. Rights Issue Allotment

• In a rights issue, shares are allotted to existing shareholders in proportion to their current holdings.

• Shareholders have a pre-emptive right to purchase additional shares before they are offered to outsiders.

• The purpose is to raise additional capital while maintaining ownership proportions.

• Rights issue allotment ensures fairness, protects shareholders’ interests, and prevents dilution of ownership.

3. Private Placement Allotment

• Shares are allotted to a selected group of investors, not the general public, under a private placement.

• It is a fast and flexible method to raise capital, usually for strategic investors, promoters, or institutional buyers.

• Compliance with Section 42 of the Companies Act, 2013 and SEBI rules (for listed companies) is required.

• Private placement allotment helps companies mobilize funds without public subscription or lengthy regulatory procedures.

4. Bonus Share Allotment

• Bonus shares are issued free of cost to existing shareholders by capitalizing the company’s reserves or profits.

• Allotment is done proportionally based on existing shareholding.

• This method rewards shareholders, increases liquidity, and signals financial stability.

• Bonus share allotment does not involve new funds but increases the number of shares each shareholder holds.

5. Preferential Allotment

• Shares are allotted to specific investors at a predetermined price, usually for strategic or financial reasons.

• Preferential allotment is common for promoters, institutional investors, or debt conversion into equity.

• It is subject to approval from shareholders and compliance with SEBI regulations (for listed companies).

• This type of allotment ensures targeted investment and strengthens relationships with strategic stakeholders.

6. Employee Stock Option Scheme (ESOP) / Sweat Equity Allotment

• Shares are allotted to employees or directors as part of an incentive or reward scheme.

• Sweat equity or ESOP shares recognize services, expertise, or intellectual contributions.

• Allotment encourages employee loyalty, retention, and alignment of employee interests with company performance.

• This method promotes long-term commitment and productivity among key personnel.

7. Oversubscription-Based Allotment

When applications exceed available shares, allotment is done based on a pre-determined method:

• • Pro-rata allotment: Each applicant receives a proportionate share.

  • Lottery: Random allocation among applicants.

Ensures fairness and transparency in distributing shares during high-demand issues.

8. Conversion-Based Allotment

• Shares allotted on conversion of other securities, such as convertible debentures or preference shares, into equity shares.

• Helps companies manage capital structure and reward investors.

• This type of allotment increases equity without fresh cash inflow but converts existing investment into ownership.

Importance of Allotment of Shares

• Conversion of Applicants into Shareholders

The primary importance of allotment is to convert applicants into shareholders legally. Once shares are allotted, applicants acquire ownership rights, including voting rights, dividend entitlement, and participation in the company’s surplus assets upon winding up. This legal recognition ensures investors’ interests are safeguarded, allowing them to exercise their rights formally. It provides the basis for shareholder accountability and enables active participation in corporate governance decisions.

• Legal Recognition and Protection of Rights

Allotment grants legal recognition to shareholders under the Companies Act, 2013. Before allotment, applications are mere proposals to subscribe. Only after allotment do investors gain enforceable rights, including claiming dividends, attending meetings, and voting on corporate matters. Legal recognition protects shareholder interests, ensuring they are formally recorded in the Register of Members, enabling regulatory oversight, dispute resolution, and protection of investments.

• Determination of Shareholding Proportion

Allotment helps determine the exact number of shares allocated to each investor, ensuring proportionate ownership. In cases of oversubscription, shares may be allotted proportionally or by lottery to maintain fairness. This process ensures equity among shareholders, prevents arbitrary allocation, and respects pre-existing shareholder rights. Accurate determination of shareholding is vital for voting rights, dividend distribution, and maintaining transparency in the company’s capital structure.

• Facilitation of Capital Mobilization

Allotment enables the company to confirm the subscription money collected and convert it into legally recognized share capital. This facilitates the mobilization of funds for business operations, expansion, or strategic investments. By allotting shares, companies secure permanent capital without increasing debt, ensuring a strong financial base for long-term growth. This is essential for funding projects and maintaining operational efficiency.

• Compliance with Legal and Regulatory Framework

Proper allotment ensures statutory compliance under the Companies Act, 2013, and SEBI regulations for listed companies. Filing the return of allotment (Form PAS-3) with the RoC is mandatory. Compliance safeguards the validity of share issues, prevents penalties, and maintains investor confidence. It also ensures that shareholding records are accurate and up to date, fulfilling both corporate governance and regulatory requirements.

• Basis for Issuance of Share Certificates

Allotment provides the foundation for issuing share certificates, which serve as legal proof of ownership. Without allotment, certificates cannot be issued, and investors cannot exercise rights such as voting or dividend collection. Accurate records of allotment ensure proper maintenance of the Register of Members, facilitating shareholder communication, statutory reporting, and legal validation of ownership.

• Enhancing Transparency and Fairness

Allotment ensures transparency in distributing shares, particularly during oversubscription. Investors are assured that shares are allocated fairly according to their applications, preventing arbitrary or biased decisions. Transparency builds investor confidence, strengthens corporate governance, and encourages participation in future issues. Proper allotment also ensures that promoters, institutional investors, and public shareholders are treated equitably.

• Building Investor Confidence

Efficient allotment enhances investor trust and confidence. By ensuring fair allocation, timely communication, and proper registration, companies reassure investors that their interests are protected. This confidence is crucial for attracting funds in future issues, maintaining market credibility, and establishing long-term relationships with shareholders. A smooth allotment process reflects financial stability, governance quality, and professionalism in capital raising.

Challenges of Allotment of Shares

• Risk of Under-Subscription

A significant challenge in allotment is under-subscription, where fewer investors apply than the shares offered. This can prevent the company from raising the intended capital and may lead to delays in business operations or expansion. Companies must carefully market the issue, set realistic pricing, and ensure investor awareness to minimize under-subscription. Failure to achieve minimum subscription can force the company to refund application money, impacting credibility.

• Investor Confidence and Market Perception

Maintaining investor confidence is crucial during allotment. Investors may hesitate if the company has a poor track record, low profitability, or weak market reputation. Negative perception can result in oversubscription rejection or under-subscription. Ensuring transparent communication, accurate disclosures, and timely information is essential to enhance investor trust and encourage participation in the allotment process.

• Oversubscription Handling

During high-demand issues, companies may face oversubscription, making it challenging to allot shares fairly. The company must adopt pro-rata allocation, lottery, or SEBI-approved methods to maintain fairness. Improper handling can lead to disputes, legal complaints, or investor dissatisfaction. Clear guidelines and adherence to rules are necessary to avoid bias or arbitrary decisions in oversubscription scenarios.

• Legal and Regulatory Compliance

Allotment is governed by Companies Act, 2013, SEBI regulations (for listed companies), and the company’s Articles of Association. Non-compliance can lead to penalties, invalid allotment, and legal disputes. Companies must ensure timely filing of return of allotment (Form PAS-3), adherence to authorized capital limits, and proper record-keeping. Compliance requires careful planning, legal expertise, and administrative oversight.

• Pricing Challenges

Setting the allotment price can be challenging, particularly for public issues. Overpricing may discourage investors, while underpricing reduces funds raised and shareholder value. Market conditions, company valuation, and investor sentiment must be analyzed carefully. Improper pricing can affect both capital mobilization and investor confidence, making it a critical consideration during share allotment.

• Ownership Dilution

Issuing and allotting new shares may lead to dilution of existing shareholders’ ownership and control. Promoters and major shareholders may lose voting power or influence in corporate decisions. Balancing the need for additional capital with shareholder interests is essential. Companies may adopt differential voting rights or preferential allotment to mitigate dilution concerns while raising capital effectively.

• Administrative and Procedural Challenges

Allotment involves meticulous administrative work, including application verification, money receipt, allocation, and updating statutory records. Errors can result in legal disputes, refund delays, or compliance issues. Companies must maintain accurate records, proper internal controls, and professional oversight to ensure smooth allotment and regulatory adherence.

• Communication and Investor Relations

A key challenge is communicating allotment results to investors promptly and clearly. Delays or errors in issuing allotment letters can damage trust. Proper communication ensures investors are aware of their allocated shares, rights, and subsequent steps such as share certificate issuance. Maintaining effective investor relations is critical for building long-term confidence and encouraging participation in future issues.