Allotment

Allotment

What is attribution

An allocation generally refers to the allocation of shares allocated to a participating underwriting company during an initial public offering (IPO). The remaining surplus goes to other companies that won the offer for the right to sell the remaining IPO shares. More unique allocation situations arise when new shares are issued and allocated to a new or existing shareholder.

BREAKDOWN Allotment

In business, the allotment describes a systematic distribution of resources between different entities and over different periods. In finance, the term generally refers to the distribution of shares during a public share issue. Two or more financial institutions generally subscribe to a public offer. Each underwriter receives a specific number of shares for sale.

However, an IPO is not the only case for the allocation of shares. The allocation occurs when the directors of a company reserve new shares for predetermined shareholders. They are shareholders who either requested new shares or acquired them by holding existing shares. For example, in a stock split, the company allocates shares proportionally based on existing ownership.

Reasons for the issue and allocation of new shares

The main reason a company issues new shares for allocation is to raise funds to finance commercial 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 short-term or long-term debt of a public enterprise. Debt repayment helps a business pay interest and changes critical financial ratios such as the debt to equity ratio and the 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 are faced with situations where current growth exceeds sustainable growth, they can issue new shares to finance the pursuit of organic growth.

Directors can issue new shares to finance an acquisition or takeover of another business. In the event of a takeover, new shares can be allocated to the existing shareholders of the acquired company, effectively exchanging their shares for shares of the acquiring company.

As a reward for existing shareholders and stakeholders, companies issue and allocate new shares. A stock dividend, for example, is a dividend that gives shareholders a new share proportional to the value of what they would have received if the dividend had been in cash.

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