A new share allotment is one of the main

ways for a company to raise new finance.

Compared to share transfers, where no new
money is received by the company, a share
allotment can provide funds to expand or
otherwise advance the business.
In this article, we take you through the
process of allotting shares

Before continuing, however, its worth making

sure that youve considered the alternatives
to issuing shares.
You should also ensure that youve
established that the directors have
appropriate authority to issue new shares and
theres no legal impediment to making a
share allotment.

1 Provide the applicants with a

form of application

Firstly you need to offer the shares to the

intended recipients, which can be done verbally
or in writing, but for a private company must be
done in such a way that it is not regarded as an
invitation to the public to subscribe for shares.
Those people wishing to apply for shares will
complete an appropriate Application for new
shares. They should return this to the company
along with the payment required for the shares.

2 Shares are allotted via board

You should convene a board meeting at which the
resolution
directors will consider the forms of application that have
been submitted. At the very least, the resolution should:

Approve the applications for shares received

Authorise the allotment of shares and detail who theyre being
allotted to
Instruct the required form(s) to be submitted to Companies
House
Authorise the issue of share certificates in respect of the new
shareholdings
Instruct the required updates to the register of members and
register of allotments

The allotment of shares formally occurs when authority

to enter the name of the allottee in the register of
members is granted, after the directors resolve to issue
shares.

3 Issue share certificates to

those who have been allotted
Companies generally issue share certificates in respect of the shares
shares
allotted, and by and large its something that shareholders will expect the

company to do. Elsewhere weve looked at the requirements for share

certificates, and Inform Direct will create and save share certificates
automatically when you allot shares, ready for you to print them.
an application for shares only becomes binding on a new shareholder when
the company notifies him that it accepts the application
As far as the requirements of the Companies Act apply, the share
certificates should be issued within two months of the share allotment. Most
companies will, however, want to issue share certificates a lot quicker than
that. This is because an application for shares only becomes binding on a
new shareholder when the company notifies him that it accepts the
application. Until that time, its entirely possible for the potential shareholder
to withdraw the application, a situation the company will obviously want to
avoid!

4 Complete a return of allotments

via form SH01 to Companies
House
Within a month of the date of the share allotment, form

SH01 must be delivered to Companies House. This form

includes a statement of capital, which describes the
overall structure of a companys shares and how much
(if anything) is left unpaid on them.
The SH01 form does not require you to give details of
the shareholders to whom shares have been issued, just
the shares themselves. However, youll need to include
details of who owns how many shares in the companys
next confirmation statement which we look at below.

5 Update the register of

members and register of
Its good practice to update the register of members
allotments

promptly as this is the primary evidence of who owns

shares in the company someone effectively becomes a
shareholder when their name is entered into the register
of members. However, in law the deadline for updating
the register of members is two months following the
board approving the allotment.
At the same time, the company should also update the
register of allotments with details of each separate
allotment of shares. Even if someone already has shares
in the company, youll need to add a new line into the
register of allotments to reflect the new shares youve
issued to them.

6 Include the allotments in the

companys next Confirmation
Statement
It is only the form SH01 that needs to be sent to
Companies House. New share certificates do not need
to be lodged at Companies House: they are simply sent
to the shareholders. However, since form SH01 only
includes details of the shares allotted and not the
shareholders, the names of the new shareholders must
be included in the companys next Confirmation
Statement (which replaced the annual return from 30
June 2016). Needless to say, having completed
allotments in Inform Direct your next confirmation
statement will automatically be populated with the
appropriate details.

7 Show the new shares issued

within the companys accounts

Youll need to liaise with your accountant to

ensure that the new share allotments are
correctly reflected in the companys accounts for
the period.
When the company issues new shares, it
increases the level of shareholders funds shown
in the balance sheet. Within the balance sheet
itself, there is different treatment given to the
total amounts raised in respect of the nominal
value of shares and share premium

ALLOTMENT PROCEDURE
Few things frustrate an investor more than applying for
shares and not getting them, especially when talk of
booming share prices leaves them with stars in their
eyes.
They simply did not get an allotment after they applied
for an Initial Public Offering.
An IPO refers to the first time a company offers its
shares to the public. After the shares are alloted
through the IPO, the stock will be listed on the stock
exchange so that the shares can be bought and sold.
A number of IPOs are in the limelight at the moment.
Since many people apply for an IPO, very few end up
with the shares.

Let me explain why this happens

and how the IPO game works.

The company will 'discover' its price

Earlier, the company determined a fixed price for the stock
issue. The issue was marketed to the general public through
advertisements and a media campaign.
Today, companies prefer a book building process. Book
building is the process of price discovery. That means there is
no fixed price for the share.
Instead, the company issuing the shares comes up with a
price band. The lowest price is referred to as the floor and the
highest, the cap.
Bids are then invited for the shares. Each investor states how
many shares s/he wants and what s/he is willing to pay for
those shares (depending on the price band).
The actual price is then discovered based on these bids.

Who can play the game?

Three classes of investors can bid for the shares:

Qualified Institutional Buyers: QIBs include mutual funds and

Foreign Institutional Investors. At least 50% of the shares are
reserved for this category.
Retail investors: Anyone who bids for shares under Rs 50,000
is a retail investor. At least 25% is reserved for this category.
The balance bids are offered to high networth individuals and
employees of the company.

How the game is played

Individuals who apply for the IPO put in their bids.

After evaluating the bid prices, the company will accept the
lowest price that will allow it to dispose the entire block of shares.
That is called the cut-off price.

Let's take an example.

Number of shares issued by the company = 100.
Price band = Rs 30 - Rs 40.
Now let's check what individuals have bid for.

Bid Number of shares Price per share

1 20 Rs 40
2 10 Rs 38
3 20 Rs 37
4 30 Rs 36
5 20 Rs 35
6 20 Rs 33
7 20 Rs 30
The shares will be sold at the Bid 5 price of 20 shares for Rs 35.

Why?

Because Bidders 1 to 5 are willing to pay at least Rs 35 per

share.
The total bids from Bidders 1 to 5 ensure all 100 shares will be
sold (20 + 10 + 20 + 30 + 20).
The cut-off price is therefore Bid 5's price = Rs 35.
Bidders 1 to 5 get allotments at that price. Bidders 6 and 7 don't
get an allotment because their bids are below the cut-off price.

How to make bidding work for you

Go for the higher price band.

As a retail investor, you don't have to specify an

exact price.
Make out a cheque for the number of shares you
are applying for at the highest end of the price band.
If you are applying for 10 shares, the amount wll be
Rs 400 (10 x Rs 40 -- the higher end of the price
band).
On allotment, the extra amount paid will be refunded
to you. Since the cut-off price is Rs 35, the 10
shares will cost you Rs 350 (10 x Rs 35). The
balance Rs 50 will be refunded to you.

How the allotment is done

The bids are first allotted to the different categories and the oversubscription (more shares applied for than the shares available)
in each category is determined.
Retail investors and high networth individuals get allotments on a
proportional basis.
Assuming you are a retail investor and have applied for 200
shares in the issue, and the issue is over-subscribed five times in
the retail category, you qualify to get 40 shares (200 shares/5).
Sometimes, the over-subscription is huge or the issue is priced
so high that you can't really bid for too many shares before the
Rs 50,000 limit is reached.

In such cases, allotments are made on the

basis of a lottery.

Say a retail investor has applied for 5 shares in an

issue, and the retail category has been oversubscribed 10 times, the investor is entitled to half a
share.
Since that isn't possible, it may then be decided that
every 1 in 2 retail investors will get allotment. The
investors are then selected by lottery and the issue
allotted on a proportional basis among.
That is why there is no way you can be sure of
getting an allotment.

How to make an allotment work for you

Put in bids in the names of your family members. The problem is,
you will need to open demat accounts for them first.
Most regular IPO investors try to calculate how much the issue
will be over-subscribed and then put in their bids accordingly.
For instance, if you want 10 shares and feel the retail portion of
the issue will be over-subscribed three times, you should bid for
30 shares.
You could also apply separately in the high networth category if
you have the money.

The CARE IPO pop and a new

type of IPO lottery

CARE listed a few days ago 2012, and it was heartening

to see that there was a listing pop, and the share did well
to close at a
23% premium to its closing price or about Rs. 170 more
than its offer price of Rs. 750.
The allotment on the CARE IPO was different from the
others we have seen previously, and while a lot of retail
investors didnt get anything at all, people who got the
allotment, got 20 shares regardless of how many they
applied for.
So, you got 20 shares if you applied for 260 shares, and
you got 20 shares if you applied for 40 shares.

This is an unusual situation, and it creates a system

which leads to a very tempting type of speculation. What
happened with the CARE IPO is that by applying for 40
shares, you blocked about Rs. 30,000 and when the
shares listed you could have made about Rs. 3,400 by
selling the IPO pop. This isnt bad at all if you can spare
that Rs. 30,000 for a couple of weeks or so, and Sunil
Srinivasan pointed to me on Twitter that if you use
ASBA, you continue to earn interest on that Rs. 30,000
as well.

In the past you have had to block a large amount of money to

get the minimum subscription for popular IPOs but with this
new method used by SEBI, you now have an incentive to
actually apply for a smaller lot during the IPO and then sell it
at the pop.

Of course the assumption is that you will have a pop and not
have a Bharti Infratel type listing which listed down 13% today.
Is it too hard to figure out which ones will be like CARE and
which ones like Bharti Infratel? Hindsight is 20/20 of course,
but during my reviews on the two IPOs I did mention that
Bharti Infratel valuation seems to be on the higher side while
CARE has priced its IPO reasonably and I certainly didnt do
any sophisticated analysis, so with the usual risk that goes
along with speculation, Id say the current system will
promote a new type of IPO speculation bidding across
accounts with small lots for certain IPOs and then selling the
pop, which is a lot better than what people had to do earlier
which was bid for huge lots and get only small amounts of
stock.

CARE IPO

CARE IPO, which closed on December 11th,

got oversubscribed by 34.11 times.
After a very long time an IPO has seen such
a good response from all the categories of
investors.
There was a huge appetite for its shares from
Qualified Institutional Investors (QIBs) and
Non-Institutional Investors (NII) categories,
which saw oversubscription to the tune of
43.31 times and 110.24 times respectively.

CARE IPO

Retail investors were a little cautious but

some of them got interested to apply for it.
This category got oversubscribed by 6.11
times.
CARE has now become the third rating
agency to get listed after CRISIL and ICRA.

CARE IPO Explaining Basis of

Allotment to Retail Individual
Bidders
CARE IPO had total 71,99,700 equity shares on offer in the

IPO, at an issue price of Rs. 750 per share. 35% of the offer
was available for allocation to the retail individual bidders in
accordance with the SEBI Regulations, which makes it
25,19,895 equity shares.
As many of you must be aware, when the investors apply for a
companys shares in an IPO, there is a bid system. With
CARE IPO, the bid lot size was in multiples of 20 shares and
the retail investors had the option to apply for a maximum of
13 lots (260 shares) and a minimum of 1 lot (20 shares).
So, the minimum investment in the CARE IPO was Rs. 15,000
and Rs. 1,95,000 as the maximum.

CARE IPO

In August this year, SEBI announced certain new measures

regarding Basis of Allotment. Some of the important
measures are:

Every retail participant gets a minimum bid lot irrespective of his

application size. This is subject to availability of shares.
The minimum application size band in an IPO has been increased from
Rs. 5,000-7,000 earlier to Rs. 10,000-15,000 now.
Issuers are now allowed to furnish the price band five working days prior
to issue opening date as against the erstwhile two working days.

So, this new system of allotment, which got used in the CARE
IPO also, has left many of the retail investors disappointed,
including me.

CARE IPO

Retail investors have been allotted only 20 shares

irrespective of their application size i.e. whether they
applied for 20 shares or 260 shares or any number of
shares in between, they got only 20 shares allotted. That
too, in the ratio of 101:256 i.e. only 101 applicants got
these 20 shares out of 256 applicants.
Actually, a total of 3,19,350 retail individual applicants
applied for it, in varying number of bid lots i.e. between 1
to 13 bid lots and only 1,25,994 applicants got the
shares allotted in the ratio of 101:256.

CARE IPOAllocation to Retail

Individual Bidders (after technical
rejection)

As you can check the Basis of Allotment in the table

above, there were 2,45,680 applicants who applied for
20 shares with each of their applications. Out of these
2,45,680 applicants, 96,929 applicants have been
allotted 20 shares each or total of 19,38,580 shares.
2,45,680 * 101/256 = 96,929 * 20 shares = 19,38,580
Similarly,
15,853 * 101/256 = 6,255 * 20 shares = 1,25,100
9,199 * 101/256 = 3,629 * 20 shares = 72,580
and so on.

I was disappointed as out of my family

members 4 applications, we got allotted only
20 shares. There have been many investors
like me who are disappointed.
But, the disappointment in the allotment is
primarily due to non-awareness of the new
system.

If the new system is analysed deeply, it is not that bad after

all. I think the idea is to encourage and favour the small retail
investors and also to discourage HNIs to take the retail
category route to apply for higher number of shares.
At the same time, it creates uncertainty in the minds of the
retail investors whether to apply for an IPO or not, as you
never know whether you will fall in those 1,25,994 successful
applicants or not.
With the new system in place, the retail investors will have to
change their strategy to get maximum number of shares
allotted in some popular IPOs like CARE i.e. they should now
apply for minimum bid lots in popular IPOs and increase the
number of applications using demat accounts of their family
members.