Allotment of shares

There may be instances where you want to change the company’s share structure by adding a new shareholder or by changing the existing share proportion between the shareholders; here the allotment of shares comes into the picture. Issuing and allotting of new shares to either new or existing shareholders by the company is called allotment of shares. Shares can be issued to both individuals and corporate bodies. In this blog, you will study in detail about the allotment of shares and its procedure.

• What is Allotment of shares?
• What are the reasons of issuing shares?
• What is the process of allotment of shares?

Share allotment

Share allotment is the process of issuing and allotting shares to either new or existing shareholders by the company. Allotment of new shares has been done usually at the time of introduction of new business partners in the company. There are various reasons for allotment of new shares – Most common being insufficient numbers of shares to transfer or when it is not ideally correct to distribute existing shares.

Issuing of shares and allotment of shares are the two different terms but in most of the companies and circumstances, it is treated as one and the same thing because of exactly the same procedure being followed. Unless the same procedure being followed in both share allotment and issuing of share, we are still able to define these two terms – Share allotment is the process of creating and issuing of shares to Company’s shareholders. It is generally issued at the time of starting a company and sometimes later on whereas share transfer is the process of transferring shares between the existing shareholders. It generally takes place after the formation of the company.

Also See: Tax advantaged employee share schemes

Reasons of issuing shares

Although, there are many reasons for the company to issue new shares but the main purpose is to raise business funds. Some of the important reasons for which shares are issued by the company are as follows –

1. To raise new funds, essentially required for the growth of the business.
2. It may be issued for the repayment of some or all borrowings of the company.
3. Company also issue shares at the time of incorporation and some important decisions are taken such as -
   1. How many shares to be issued?
   2. What will be the share price?
4. Initial capital is very much required when you planned to invest in a new project. Sometimes shares can also be issued to raise funds for a new project or development for which the rewards will be seen in the coming years.
5. Shares can also be issued for raising funds in order to purchase a new business or a company. In such cases, new shares are issued to the existing shareholders of the target company so that it can be exchanged between your shareholders and the new company’s shareholders.
6. Many of the small businesses goes through the period of financial crisis and in order to repair their damaged balance sheet and trade continuation, allotting of shares is considered as one of the best option.
7. Shares are also been issued when it is granted by the company as a share option to director or employees. It can easily be acquired through allotment.
8. In case some shareholders don’t prefer receiving cash dividend, shares of same value are allotted to them by the company as cash dividend. It is also known as issuing of ‘Scrip’ dividend. This concept is popular among many companies as issuing of shares as a dividend does not put impact on the cash flow of the business the way cash dividend does.
9. When the company make use of their own profits to fund the allotment which in turn reduces the shares value in issuing and make them more marketable to investors.
10. Shares can also be issued at the time of joining of a new director or senior employee becomes a director. The shares are transferred to the new employee from the existing shareholders or by allotment of new shares.

Also See: Gifting shares to employees and HMRC valuation

Process of allotment of shares

Every company needs to perform certain steps in order to allot shares to the new shareholders. The step by step procedure for allotment of shares is as follows –

1. Confirmation to shareholdings and shareholders ID

   - Before allotting the new shares, it is necessary for you to confirm the current shareholdings, shares you are going to introduce and the final shareholding structure of your shareholders. There are many details that you need to confirm while allotting shares to a new shareholder -
   1. Name
   2. Nationality
   3. Date of birth
   4. Residential address
   5. ID proof
   6. Relationship with other shareholders

Also See: How to Buy Shares UK: Trading, Investment and Stock Market

2. Holding a board meeting

   - A board agreement is very necessary for the allotment of shares. After confirming to shareholdings and shareholder ID, changes in the company’s share structure must be approved in the board meeting. Detailed minutes of board meeting should contain the information regarding the revised share structure as well as shareholders and it must be kept safe with the company records. These details are later notified to the company’s house and can also be displayed as evidence at the time of audit.

3. Updating Companies house for allotment of new shares

   - After allotment of shares, details must be notified within one month of allotment to Companies house by completing and filing statement of capital (SH01) form. You can easily complete this form on Companies house website. This form is basically used for updating company’s share structure to Companies house. This form does not include shareholders details and the details regarding number of allotted shares are provided.

4. Issuing of new share certificates

   - After updating Companies house for allotment of new shares, new share certificates are issued to the shareholders as per the new share structure. Share certificate contains the details about shareholdings and the previously issued share certificates will get automatically cancelled.

5. Updating Company’s confirmation statement (CS01) with new share totals

   - It is mandatory for you to update company’s confirmation statement (CS01) with Companies house. After updating the confirmation statement, new share structure will be displayed within the company.

In case you have a new shareholder, you must include the shareholder’s details in the confirmation statement of your company as form SH01 does not include any details related to the new shareholders.

Also See: Nominee Director & Nominee Shareholder UK

In case you want more information or advice on allotment of shares, kindly call us on 03330886686 or you can also e-mail us at enquiry@dnsaccountants.co.uk

Also See: Entrepreneurs Relief When Selling Shares

Also See: Issuing of Share Certificate

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.