What it means
The word describes a specific legal step rather than a vague allocation. A company offers shares, investors apply and pay, the directors or their underwriters then allot the shares, and only at that point does a binding contract exist between the company and the new shareholder.
Allotment matters most when an issue is oversubscribed, meaning applications add up to more than the shares available. The underwriter can scale everyone back proportionally, favour long-term institutional investors, apply a ballot, or cap the size of any single allocation to spread the register more widely.
Retail investors often meet the term through an initial public offering where they apply for a certain number of shares and receive far fewer. Money paid for shares that were not allotted is refunded, usually within a few days of the allotment being announced.
Companies also use allotment outside a public offer. Directors allot shares when they issue stock to a founder, complete a rights issue, convert a loan note into equity, or grant shares under an employee scheme, and most company laws require specific shareholder authority before they may do so.
Note the difference between allotment and issue. Allotment is the decision and acceptance of an application; issue is completed when the shareholder's name is entered on the register and the share certificate or electronic holding exists.
In practice
Real-world examples.
Example
A renewable energy developer floats on the exchange and receives applications worth three times the offer. The bookrunners allot 80% of the stock to pension funds and insurers with long holding periods, leaving retail applicants scaled back sharply, so that the price is less likely to fall on the first day of trading.
Example
A family-owned engineering firm brings in a new operations director and agrees to give her 5% of the company. The board passes a resolution to allot 50,000 new shares to her at nominal value, diluting the existing holders slightly and recording the allotment in the statutory register.
Example
A property trust runs a rights issue offering existing shareholders one new share for every four held. Shareholders who take up their full entitlement are allotted exactly what they applied for, while shares left over from holders who declined are allotted to those who applied for extra.
Formula
Calculation
Subscription ratio = shares applied for / shares available
Allotment ratio = shares available / shares applied for
Shares allotted to one applicant = shares applied for x allotment ratio
A company offers 5,000,000 new shares at $8.00 each, seeking $40,000,000. Applications arrive for 20,000,000 shares, so the issue is oversubscribed by 20,000,000 / 5,000,000 = 4 times, and the allotment ratio on a straight pro-rata basis is 5,000,000 / 20,000,000 = 25%.
An individual investor applies for 4,000 shares and pays 4,000 x $8.00 = $32,000 with the application. On a 25% scale back the investor is allotted 4,000 x 25% = 1,000 shares, costing 1,000 x $8.00 = $8,000, and the remaining $32,000 - $8,000 = $24,000 is refunded. The company still receives its full 5,000,000 x $8.00 = $40,000,000, because the scale back changes who holds the shares, not how much is raised.Case study
Seen in the real world.
This is an illustrative, fictional scenario. Ravensmoor Instruments, an invented laboratory equipment maker, offered 12,000,000 shares at $5.00 to raise $60,000,000 and received applications for 36,000,000 shares, three times the offer. The founders wanted a wide retail register and pushed for an even pro-rata allotment of 12,000,000 / 36,000,000 = one third to every applicant.
The advisers argued for a different split. They proposed allotting 9,000,000 shares to twenty institutions that had agreed informal lock-up commitments and 3,000,000 across retail applicants, on the view that a register full of small applicants who had each been scaled back to a third of what they wanted would produce heavy selling in week one.
The illustrative company took a middle path, allotting 8,400,000 shares to institutions and 3,600,000 to retail with a minimum allocation of 200 shares each so that small applicants received something usable. Trading in the first month was calm, and the finance team noted that the refunds of roughly $120,000,000 to unsuccessful applicants had to be paid within four business days, which required careful cash planning.
Watch out
Common mistakes.
- Assuming an application guarantees the shares, when directors or underwriters may allot fewer shares or none at all.
- Treating allotment and issue as the same event, which causes confusion about the exact date a person becomes a shareholder.
- Forgetting that directors normally need shareholder authority before allotting new shares, and that acting without it can make the allotment challengeable.
Questions
People also ask.
What happens to money paid for shares I do not receive?
It is refunded, usually within a few business days of the allotment announcement, though the cash sits idle in the meantime.
Can a company allot shares to some applicants and not others?
Yes, since the offer terms usually give the directors or underwriters discretion, provided the basis of allotment is applied consistently and disclosed.
Does allotment change the share price?
Not directly, because the price is set in the offer, though a poorly judged allotment can affect how the shares trade once dealings begin.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%