Allotment of Shares- Meaning, Process and Journal Entries
When studying company finance, it is useful to understand the allotment of shares and how companies distribute ownership to investors. It also helps investors understand share issues and topics such as the upcoming buyback of shares, which involves a company purchasing its own shares.
What Is Allotment of Shares?
Allotment of shares is the process through which a company officially assigns shares to people who apply to buy them. It gives successful applicants ownership rights according to the number and type of shares they receive. Companies use this process when they raise money to start a business, expand their operations, or finance new projects. The company decides how many shares to allot based on the offer terms, applications, and applicable legal requirements.
For example, ABC Limited offers 10,000 shares to investors at Rs. 100 each. If Ali applies for 100 shares and the company accepts his application, it allots 100 shares to him and records his shareholding.
Why Is Allotment of Shares Important?
Share allotment helps companies raise capital without taking a traditional bank loan. The company can use the money to purchase equipment, open new branches, develop products, or meet other business needs. It also allows investors to become shareholders and participate in the company’s growth. Depending on the share class and company rules, shareholders may receive dividends, voting rights, or other benefits.
The main purpose of share allotment is to assign shares properly and establish ownership records. Companies must follow the relevant laws, their constitutional documents, and the conditions of the share offer.
Process of Allotment of Shares
The process begins when a company decides to issue shares and sets the number, price, and terms of the offer. It then invites eligible investors to apply through the required procedure.
1. Issue of Shares
The company announces the share offer and provides important details, such as the share price, application period, and payment conditions. Depending on the type of offer, it may publish a prospectus or provide an offer document to eligible investors.
2. Receipt of Applications
Interested investors submit applications and pay the required application money. The company checks the applications to confirm that applicants have followed the stated conditions.
3. Review and Approval
The company reviews the applications and determines how many shares each applicant should receive. If demand exceeds the number of available shares, the company may make a proportionate or other permitted allotment according to the offer terms and applicable rules.
4. Allotment and Record Keeping
After approval, the company records the shares assigned to each successful applicant. It also completes the required shareholder documentation and regulatory filings.
5. Refund of Excess Application Money
If the company receives more application money than it needs for the shares allotted, it handles the excess amount according to the offer terms and applicable law. It must also deal with unsuccessful applications in the required manner.
Types of Allotment of Shares
| Type | Meaning |
|---|---|
| Initial allotment | Shares are assigned to the subscribers when a company is formed. |
| Public issue | A company offers shares to the public and allots them to successful applicants. |
| Rights issue | Existing shareholders receive an offer to buy additional shares, often in proportion to their current holdings. |
| Preferential allotment | A company allots shares to selected investors or persons under applicable rules. |
| Bonus issue | A company distributes additional shares to eligible existing shareholders using permitted reserves. |
Example of Allotment of Shares
Suppose XYZ Limited offers 5,000 shares at Rs. 50 per share. Investors apply for 4,000 shares, and the company allots all 4,000 shares to successful applicants.
The following table shows the calculation.
| Particulars | Details |
|---|---|
| Total shares offered | 5,000 |
| Price per share | Rs. 50 |
| Shares applied for | 4,000 |
| Shares allotted | 4,000 |
| Total amount for allotted shares | Rs. 200,000 |
| Shares remaining from the offer | 1,000 |
Journal Entries for Allotment of Shares
Companies record share transactions in their accounting books to show the money received and the capital raised. The journal entries depend on the payment terms and the stage of the share issue.
Suppose ABC Limited allots 1,000 shares at Rs. 100 each, and the full amount becomes payable at allotment. The company records the following entry when the amount becomes due.
| Account | Debit (Rs.) | Credit (Rs.) |
|---|---|---|
| Share Allotment Account | 100,000 | — |
| Share Capital Account | — | 100,000 |
When the company receives the payment, it records another entry.
| Account | Debit (Rs.) | Credit (Rs.) |
|---|---|---|
| Bank Account | 100,000 | — |
| Share Allotment Account | — | 100,000 |
Legal Rules for Allotment of Shares
Companies must follow the laws and regulations that apply in their country. These rules help protect investors, maintain accurate records, and ensure that companies handle share applications fairly. In Pakistan, the Companies Act, 2017 provides rules for share applications, allotments, and related filings. Section 70 generally requires a company with share capital to file a return of allotment with the registrar within 45 days, subject to the law’s provisions and applicable exceptions. <escape>Read the Companies Act, 2017</escape>
The Securities and Exchange Commission of Pakistan (SECP) also provides guidance on company filings and electronic reporting. Its Companies Regulations, 2024 FAQs explain how companies report different types of allotments through the eZfile system. Companies should check the latest regulations before completing an allotment because filing requirements can depend on the transaction and the company’s legal status. <escape>Read the SECP company regulation FAQs</escape>
Difference Between Issue and Allotment of Shares
Many students confuse the issue of shares with the allotment of shares. Although these terms relate to the same process, they describe different stages.
| Basis | Issue of Shares | Allotment of Shares |
|---|---|---|
| Meaning | The company offers shares to investors. | The company assigns shares to successful applicants. |
| Main purpose | To invite investment and raise capital. | To determine who receives the shares. |
| Process | Includes the offer and related issue procedures. | Involves accepting applications and assigning shares. |
| Result | Investors get an opportunity to subscribe. | Successful applicants receive an allocation of shares. |
Benefits of Share Allotment for Companies and Investors
Share allotment gives companies a way to obtain funds for business activities and future growth. Unlike a conventional loan, ordinary share capital does not usually require regular repayment of the principal, although issuing shares can reduce existing owners’ percentage of ownership.
Investors can benefit by becoming shareholders in a company they believe has growth potential. They may receive dividends when the company declares them and may benefit if the market value of their shares rises. However, share ownership does not guarantee profits or dividends. Share prices can fall, and investors may lose some or all of their invested money.
Common Mistakes During Share Allotment
Companies can face problems when they fail to check applications, record payments correctly, or follow legal requirements. Accurate records and careful review help reduce these risks. Common mistakes include allocating more shares than the offer permits, failing to refund money where required, recording incorrect shareholder details, and missing regulatory filing deadlines. Companies should also explain the payment terms clearly so that applicants understand their obligations.
Investors should read the offer documents carefully and confirm the number of shares allotted to them. They should also keep payment records and allotment confirmations for future reference.
Conclusion
Allotment of shares is an important part of company finance because it determines how a company assigns shares to applicants. It helps businesses raise capital, establishes shareholder ownership, and creates the records needed to manage share capital properly.
Understanding the process, types, accounting entries, and legal requirements makes this topic easier for students, business owners, and investors. Companies that follow the correct procedures can maintain reliable records and build greater confidence among their shareholders.
