What is an 'Allotment'
An allotment commonly refers to the allocation of shares granted to each participating underwriting firm during an initial public offering (IPO). In these situations, remaining surpluses are then given to other firms that have won the bid for the right to sell the IPO. There are more unique situations of allotment, however, that arise when new shares are issued and allocated to either new or existing shareholders.
BREAKING DOWN 'Allotment'
Allotment, in business, is meant to describe a systematic distribution of resources across different entities and over different time periods. In finance, allotment is normally related to the distribution of shares during a public share issuance. The public offering is normally underwritten by two or more financial institutions, of which each are given a specific number of shares to sell. The distribution of shares is the act of allotting the pot of total equity between the participating parties.
However, an IPO is not the only case in which new shares are allotted. Allotment also arises in situations where the directors of a company allocate new shares to intended shareholders who have either applied for new shares or earned them by owning existing shares. In a stock split, for example, shares are allotted proportionately based on existing ownership.
Reasons for New Share Issuance and Allotment
The number one reason a company issues new shares for allotment is to raise money to finance business operations. Even IPOs are generally conducted for this reason. In fact, there are very few other reasons as to why a company issues and allocates new shares.
For example, new shares can be issued to repay a public company's short- or long-term debt. This helps a company with its interest payments and changes key financial ratios such as the debt-to-equity ratio and debt-to-asset ratio. A company may still want to issue new shares even if there is little or no debt. When companies face situations where current growth is outpacing sustainable growth, they can issue new shares to fund the continuation of organic growth.
Company directors may issue new shares to fund an acquisition or takeover of another business. The new shares can be allotted to existing shareholders of the acquired company, effectively exchanging their shares for equity in the acquiring company.
New shares can be issued and allotted as a form of reward to existing shareholders and stakeholders. A scrip dividend, for example, is a dividend that gives equity holders a number of new shares proportional to the value of what they would have received if the dividend was cash.