Difference Between Issue and Allotment of Shares

In the corporate world, the issue and allotment of shares are crucial processes that enable companies to raise capital and allow individuals or entities to become part-owners of the business. These processes form the backbone of a company’s financial structure and are regulated by strict legal frameworks to ensure fairness and transparency. This article explores the intricacies of issuing and allotting shares, shedding light on their purposes, procedures, and differences.

What is the Issue of Shares?

The issue of shares refers to the process by which a company makes its shares available for purchase to the public or selected investors. By issuing shares, companies raise funds that are essential for their growth, operational activities, or other strategic objectives.

Types of Share Issues

1. Public Issue:
   • Shares are offered to the general public through a prospectus.
   • Often carried out during an Initial Public Offering (IPO).
2. Private Placement:
   • Shares are offered to a select group of investors, such as institutions or high-net-worth individuals.
   • Quicker and less regulatory burdens compared to public issues.
3. Rights Issue:
   • Existing shareholders are given the opportunity to purchase additional shares, often at a discounted price.
4. Bonus Issue:
   • Free shares are distributed to existing shareholders from the company’s reserves.
5. Preferential Issue:
   • Shares are issued to specific investors at a pre-determined price.

Key Objectives of Issuing Shares

• Raising Capital: To finance expansion, acquire assets, or repay debts.
• Enhancing Market Reputation: Public issues increase visibility and credibility.
• Encouraging Participation: Allows individuals and institutions to invest in the company.

What is the Allotment of Shares?

The allotment of shares is the process of assigning shares to individuals or entities who have applied for them. It occurs after the issue of shares and represents the final step in creating a legally binding relationship between the company and the shareholders.

Key Features of Allotment

1. Acceptance of Application:
   • Investors submit applications for shares during the issue process.
   • The company reviews these applications and decides the allocation.
2. Board Approval:
   • The Board of Directors decides the number of shares to be allotted to each applicant.
3. Issuance of Share Certificates:
   • After allotment, the company issues share certificates within a stipulated period, usually within 60 days as per the Companies Act, 2013.
4. Legal Implications:
   • Allottees become shareholders, gaining rights such as voting, dividends, and participation in company affairs.

Key Differences Between Issue and Allotment of Shares

Here are the primary differences between the issue and allotment of shares, explained by various aspects:

Definition

• Issue of Shares: The process of making shares available for purchase by the public or select investors.
• Allotment of Shares: The formal allocation of shares to individuals or entities who applied for them.

The issue of shares sets the stage by inviting potential investors, while allotment finalises the process by assigning ownership to specific applicants.

Purpose

• Issue of Shares: Aimed at raising capital to meet financial needs such as business expansion or debt repayment.
• Allotment of Shares: Ensures the proper distribution of shares among applicants in a fair and systematic manner.

The purpose of issuing shares is to attract funds, whereas the purpose of allotment is to fulfil investor applications and create shareholders.

Process

• Issue of Shares: Involves advertising, prospectus preparation, and offering shares for subscription.
• Allotment of Shares: Involves reviewing applications, allocating shares, and issuing share certificates.

The issue process focuses on market outreach, while the allotment process focuses on internal decision-making for fair allocation.

Chronology

• Issue of Shares: Occurs before the allotment stage as the shares must be offered first.
• Allotment of Shares: Follows the issue, finalising the relationship between the company and its shareholders.

The issue of shares is the first step in creating shareholder relationships, whereas allotment is the concluding step.

Decision-Making Authority

• Issue of Shares: Managed by the company’s management and Board of Directors.
• Allotment of Shares: Handled exclusively by the Board of Directors based on applications received.

The decision to issue shares is a strategic financial decision, while the allotment of shares is a procedural task executed by the board.

Legal Significance

• Issue of Shares: Establishes an open offer for investment, inviting potential investors.
• Allotment of Shares: Forms a binding contract, granting ownership rights to shareholders.

The issue creates opportunities for investment, while allotment finalises legal ownership and shareholder rights.

Completion

• Issue of Shares: Completes when shares are available for subscription or sale.
• Allotment of Shares: Completes when shares are allocated and share certificates are issued.

The issue is considered complete once the offer is open, while allotment concludes after the distribution of shares.

Laws Governing Issue and Allotment of Shares

The processes of issuing and allotting shares are governed by strict laws to ensure compliance and fairness. In India, these processes are primarily regulated by the Companies Act, 2013, alongside rules laid out by the Securities and Exchange Board of India (SEBI).

Important Provisions under the Companies Act, 2013

1. Section 23: Governs the issuance of shares for public or private companies.
2. Section 39: Mandates that a company must receive the minimum subscription before allotting shares.
3. Section 42: Details the procedure for private placement of shares.
4. Section 53: Prohibits companies from issuing shares at a discount, except under specific conditions.
5. Section 62: Explains the procedure for issuing rights shares.

Timelines for Allotment

• Share certificates must be issued within 60 days of allotment.
• The return of allotment must be filed with the Registrar of Companies (RoC) within 30 days.

Conclusion

The issue and allotment of shares are foundational elements in the financial structure of any company. While the issue of shares focuses on making shares available to investors, the allotment of shares formalises the process by allocating ownership to applicants. Both processes require meticulous planning, strict adherence to legal frameworks, and effective communication with stakeholders. By understanding the nuances of these processes, companies can ensure a smooth and compliant journey toward raising capital and achieving their business goals.