Difference Between Allotment and Issue of Shares

Key Difference – Allotment vs Issue of Shares
 

Share allotment and share issue are two important criteria for businesses to consider in decisions of raising finance. The key difference between allotment and issue of shares is that an allotment is a method of share distribution in a company whereas share issue is the offering of the ownership of the shares to shareholders to hold, and later transfer to another investor.

CONTENTS
1.Overview and Key Difference
2. What is an Allotment
3. What is an Issue of Shares
4. Side by Side Comparison – Allotment vs Issue of Shares

What is an Allotment?

Allotment refers to the allocation of shares among the interested investors, and it decides the overall composition of the shareholding. Allotment represents how much shares each shareholder holds; thus deciding the bargaining power of the shareholders (majority or minority shareholders). There are 3 main types of share allotment that are commonly practised by companies,

Share Allotment in an Initial Public Offering (IPO)

An IPO is when a company obtains a listing on a stock exchange and start trading shares to the general public. The share allocation that was originally among private investors will be further divided among a large number of investors.

Allotment through a Rights Issue or Bonus Issue

Shares can be allocated among existing shareholders as opposed to new ones, to the proportion of existing shareholding. In rights issue, shares will be offered at a discounted price to the market price whereas, in a bonus issue, shares will be allocated instead of a dividend payment.

Making a Bulk Allotment to an Individual or Institution

Shares can be issued to a selected party such as an institutional shareholder, business angel or a venture capital firm. This type of allotment often results in a change in the ownership status since a significant portion of shares is allocated.

What is an Issue of Shares?

Issue of Shares is the legal transfer of ownership of the shares to the investor by the company. A company issues a share only once; after that, the investor may transfer its ownership by selling to another investor. When the company is first incorporated, a number of shares will be issued, which will be decided based on a number of factors. All relevant information relating to an issue of shares is specified in the legal document named ‘Prospectus’.  When in ambiguity, the company can seek professional advice to obtain assistance in deciding the number of shares that should be issued. The following factors should be considered in the decision of the number of shares to be issued.

Authorised Share Capital

Authorised Share Capital is also referred to as the registered share capital; this is the maximum amount of capital that a company is authorised to raise from the public by the issue of shares. The amount of authorised share capital should be specified in the Certificate of Incorporation, which is a legal document relating to the formation of a company. The entire number of authorised shares may not be issued to the public during the same issue.

Structure of the Company

The number of shares that should be issued is affected by whether the company is a private or a public entity. While regulations specifying terms for private companies are minimal; a nominal value (stated value) is specified for public companies which must have at least £50,000 nominal value of issued share capital.

E.g. If the nominal value of a share is £2, at least 25,000 shared should be issued.

Size of the Company and Funding Requirements

Large scale companies are likely to have significant funding requirements compared to smaller companies. Furthermore, if the company is reasonably established, it has the ability to raise more funding since investors are willing to utilise their funds in stabilised businesses.

Dilution of Control

Once the shares are issued to the public new investors, they become shareholders in the company. This may result in changes in the ownership structure in the company. Thus, original owners should decide how much control they are prepared to forgo as they decide the number of shares to be issued.

The price at which the shares should be issued is as important as the number of shares. The respective price should not be overstated in order to attract investors and should not be understated as it sends a negative single to the market. Companies in high growth markets and companies with a unique product or service are well positioned to issue shares at a higher price.

What is the difference between Allotment and Issue of Shares?

Reference List:

“Allotment.” Investopedia. N.p., 18 Nov. 2003. Web. 31 Jan. 2017.

“Issued Shares.” Investopedia. N.p., 05 Apr. 2016. Web. 31 Jan. 2017.

Image Courtesy:

“76197” (Public Domain) via Pixabay

“Sao Paulo Stock Exchange”  By Rafael Matsunaga – Flickr (CC BY 2.0) via Commons Wikimedia