Allotment

Reviewed by Vishnu | Updated on Aug 27, 2020

What is Allotment?

Allotment refers to the portion of shares that are allocated to an underwriting participant during an Initial Public Offering (IPO). Once the underwriting firm has been allotted, the remaining shares are allocated to the other firms that participated in the same and have won the right to sell them.

Understanding Allotment

Allotment refers to the term that generally arises when a firm or business entity decides to issue its shares for the general public. However, before the shares are made available to the public, the offering is underwritten by two or more financial institutions. The underwriters are then allotted with a specific number of shares to sell to the public.

When will a Company Issue New Shares?

A major reason for a company to issue new shares is to raise capital for its business expansion or to finance its operations. A company raises capital by issuing an IPO.

Companies can also choose to issue new shares to repay the company's short or long-term debts. When a company pays down its debts, crucial financial ratios, such as the debt-to-asset ratio and the debt-to-equity ratio comes down significantly.

Also, when a company is being acquired by another company or acquiring another company, the company directors can issue shares to fund the same. Existing shareholders of the acquired company are also issued new shares in return for the shares of the existing shares when a company takes over.

In some cases, companies also choose to issue and allot new shares to existing stakeholders as reward or a token of gratitude. Shareholders can also choose to purchase new shares of the company in proportion to the value of cash they would receive as dividends.