What is Allotment
An allotment commonly refers to the allocation of shares granted to a participating underwriting firm during an initial public offering (IPO). Remaining surpluses go to other firms that have won the bid for the right to sell the remaining IPO shares. There are more unique situations of allotment that arise when new shares are issued and allocated to either a new or existing shareholder.
BREAKING DOWN Allotment
In business, allotment describes a systematic distribution of resources across different entities and over various time periods. In finance, the term typically relates to the distribution of shares during a public share issuance. Two or more financial institutions usually underwrite a public offering. Each underwriter receives a specific number of shares to sell.
However, an IPO is not the only case of share allocation. Allotment arises when directors of a company earmark new shares to predetermined shareholders. These are shareholders who have either applied for new shares or earned them by owning existing shares. For example, in a stock split, the company allocates shares 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. An IPO is also used to raise capital. In fact, there are very few other reasons why a company would issue and allocate new shares.
New shares can be issued to repay a public company's short- or long-term debt. Paying down debt helps a company with interest payments and changes critical financial ratios such as the debt-to-equity ratio and debt-to-asset ratio. There are times when a company may 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 may 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. In the case of a takeover, new shares can be allotted to existing shareholders of the acquired company, efficiently exchanging their shares for equity in the acquiring company.
As a form of reward to existing shareholders and stakeholders, companies issue and allot new shares. A scrip dividend, for example, is a dividend that gives equity holders some new shares proportional to the value of what they would have received if the dividend was cash.