Issuing and allotting shares are important processes for companies that want to raise funds by selling ownership in the company. In this article, we will discuss the meaning and process of issuing and allotting shares, as well as the legal requirements and implications involved.

What is Issuing and Allotment of Shares?

Issuing shares refers to the process of creating new shares and offering them for sale to the public or private investors. The company decides on the number of shares to issue, their type, and the price at which they will be sold. Once the shares are created, they are available for purchase by investors.

Allotting shares, on the other hand, refers to the process of assigning shares to specific buyers. When an investor decides to purchase shares in a company, the company allocates a certain number of shares to the investor. The investor becomes a shareholder in the company, and their ownership in the company is proportionate to the number of shares they own.

Process of Issuing and Allotting Shares

Issuing and allotting shares involve several steps that companies must follow to ensure legal compliance and transparency. The process typically involves the following steps:

1. Approval by the Board of Directors: The first step in issuing and allotting shares is for the board of directors to approve the issuance of new shares. The board must determine the number of shares to be issued, their type, and the price at which they will be sold.
2. Shareholder Approval: In some cases, companies may be required to seek approval from their shareholders before issuing new shares. This is typically required for public companies, as shareholders have a say in the company’s decision-making process.
3. Filing with Regulatory Authorities: Once the board of directors and shareholders approve the issuance of new shares, the company must file the necessary paperwork with regulatory authorities, such as the Securities and Exchange Commission (SEC) in the United States.
4. Offering of Shares: After regulatory approval, the company can offer the shares to the public or private investors. The company may choose to offer the shares through a public offering, private placement, or a combination of both.
5. Allotment of Shares: Once investors express interest in purchasing shares, the company will allot the shares to them based on the number of shares they wish to purchase and the availability of shares. The company must keep accurate records of the number of shares allotted to each investor.

Legal Requirements for Issuing and Allotting Shares

Issuing and allotting shares must comply with various legal requirements to ensure transparency and fairness in the process. Some of the legal requirements include:

1. Company Act: Companies must comply with the Company Act of their respective countries, which outlines the legal requirements for issuing and allotting shares. The Company Act typically requires companies to seek shareholder approval, file paperwork with regulatory authorities, and keep accurate records of share allotment.
2. Securities Laws: Securities laws govern the sale of shares to investors. These laws require companies to provide investors with accurate and complete information about the company’s financial health, operations, and risks associated with investing in the company.
3. Stock Exchange Regulations: Companies must comply with the regulations of the stock exchange on which their shares are listed. These regulations typically require companies to disclose important information to the public, such as financial statements, earnings reports, and other important announcements.

Implications of Issuing and Allotting Shares

Issuing and allotting shares have several implications for companies and investors, including:

1. Dilution of Ownership: When a company issues new shares, it dilutes the ownership of existing shareholders. This means that each shareholder’s ownership in the company decreases proportionately to the number of new shares issued.
2. Fundraising: Issuing and allotting shares are a common way for companies to raise funds to finance their operations or invest in new projects. By selling shares to investors, companies can generate the necessary capital to grow and expand their business.
3. Voting Rights: Shareholders have the right to vote on important company matters, such as electing the board of directors, approving mergers or acquisitions, and making changes to the company’s bylaws. The number of votes each shareholder has is proportionate to the number of shares they own.
4. Dividend Payments: Shareholders are entitled to receive dividends, which are a portion of the company’s profits distributed to shareholders. The amount of dividends each shareholder receives is proportionate to the number of shares they own.
5. Regulatory Compliance: Issuing and allotting shares require compliance with various legal and regulatory requirements, including securities laws and stock exchange regulations. Non-compliance can result in legal penalties, fines, and damage to the company’s reputation.

Conclusion

Issuing and allotting shares are important processes for companies looking to raise funds by selling ownership in the company. The process involves creating new shares, offering them for sale, and assigning them to specific buyers. Companies must comply with legal and regulatory requirements to ensure transparency and fairness in the process. Shareholders have important rights, including the right to vote and receive dividends, and must fulfill certain duties, including the duty of loyalty to the company. Understanding the process of issuing and allotting shares is essential for investors and entrepreneurs looking to start or invest in a business.