Allotment of Shares: Essential Guide to Issuing New Shares
- Published: 16 July 2025
- 11 min read
- Running a Business, Bookkeeping
Rodney Wong
Author
Rodney supports customers in the UK in understanding the details and benefits of our products and services, helping them see how technology can transform their business. Passionate about the impact of the written word, he translates tech topics into clear, relevant, and practical insights, inspiring entrepreneurs to bring their ideas to life.
Mosan Ali
Reviewer
Mosan Ali is our Accounting Manager based in the UK and has a wealth of knowledge of UK GAAP, VAT, and PAYE. With 12 years of experience crunching numbers and ensuring compliance, he keeps our financial reporting ship-shape. Think of Mosan as our blog's accounting guru. He carefully reviews our UK-focused content, ensuring it's accurate, up-to-date, and packed with helpful tips for UK businesses. Get your taxes right from day one with our informative blog posts.
An allotment of shares takes place when a company issues new shares to raise capital or attract new investors. This guide covers the process, its impact on existing shareholders, and legal requirements.
Key Takeaways
- Share allotment is a critical process for raising capital, but it can dilute existing shareholders’ ownership if they do not purchase additional shares.
- The share allotment process involves key steps, including confirming shareholdings, holding a board meeting, filing Form SH01, issuing share certificates, and updating the confirmation statement.
- There are benefits and risks associated with share allotment; while it allows companies to generate capital and existing shareholders to maintain ownership rights, it may also lead to dilution and fluctuating share values.
Understanding Share Allotment
Share allotment refers to the creation and issuance of new shares by a company during a public share issue. This process is not merely about increasing the number of shares but is pivotal for raising the capital necessary for business operations and attracting new investors. Imagine a company as a pie; share allotment is akin to baking a bigger pie, allowing more shares to be allotted to more people.
However, understanding the implications for existing shareholders is crucial. When new shares are issued, the ownership proportion of existing shareholders can be diluted. This means their percentage of the pie becomes smaller unless they, as a new shareholder, purchase additional shares.
Osome's comprehensive accounting services ensure your share allotment process is fully compliant with local regulations and properly documented. From preparing resolutions to filing with authorities, we handle the administrative details so you can focus on growing your business.
This delicate balance between raising capital and maintaining shareholder value is at the heart of every share allotment exercise.
The Process of Allotting Shares
Allotting shares is a structured process that involves several critical steps, each requiring meticulous attention to detail. Each phase, from confirming shareholdings to updating the confirmation statement, plays a crucial role in ensuring a smooth and compliant share allotment process. The goal is to allot shares effectively and efficiently.
Understanding these steps can help companies navigate this complex undertaking and turn it into a rewarding journey.
Step | Description |
|---|---|
| 1. Confirming Shareholdings🧾 | Verify the identity of new shareholders and their relationship to existing ones. Shares are considered allotted once entered in the register of members. |
| 2. Board Meeting📋 | Directors meet to approve the number and terms of share allotment. Minutes are recorded, and authority is given to update the share register. |
| 3. Filing Form SH01 🏛️ | Submit Form SH01 to Companies House within one month, detailing the updated share capital and structure. |
| 4. Issuing Share Certificates 📄 | New share certificates are issued to shareholders, replacing old ones. A formal allocation letter is also sent. |
| 5. Update Confirmation Statement ✅ | Update the confirmation statement to reflect new shareholders and any share structure changes, ensuring accuracy and legal compliance. |
Confirming shareholdings
The first step in the share allotment process is confirming shareholdings. This involves verifying a new shareholder’s identification and their relationship to existing shareholders. According to the Companies Act 2006, shares are considered allotted when a person gains an unconditional right to be registered as a shareholder. This means that their name must be entered into the register of members to formalise their shareholding status.
Verifying current shareholdings is not just a formality; it is vital for ensuring the accurate allotment of new shares. This step helps prevent any discrepancies and ensures that the company’s share capital is correctly represented. This step is akin to taking stock before adding new inventory, ensuring everything is in order before proceeding.
Board meeting for share allotment
Once shareholdings are confirmed, the next step is to hold a board meeting. The purpose of this meeting is to agree on changes to the company’s share structure. During the meeting, company directors discuss and decide on the number of shares to be allotted and the terms of such allotment. Detailed minutes must be taken to accurately reflect the updated share structure and shareholdings.
After the directors resolve to issue shares, authority is granted to enter the name of the allottee in the register of members, by the company’s constitution. This formal resolution ensures that all actions taken comply with corporate governance norms and statutory requirements.
Holding a board meeting is crucial for ensuring transparency and compliance with legal obligations in the share allotment process.
Filing Form SH01 with Companies House
Following the board meeting, Form SH01 must be submitted to Companies House within one month of the share allotment. This form provides an updated capital statement, reflecting the new share structure. Timely submission of Form SH01 is crucial for compliance with Companies House regulations, ensuring that the company’s records are up to date and accurate.
Maintaining transparency and accountability in the company’s share capital hinges on this step. Any delays or inaccuracies in filing Form SH01 can lead to compliance issues, potentially resulting in penalties for the company.
Submitting Form SH01 correctly and on time is imperative for the share allotment process.
Issuing new share certificates
Once new shares are allotted, share certificates must be issued promptly to the new shareholders. These certificates serve as formal proof of ownership and are a crucial part of the share allotment process. Along with the share certificates, a formal notification of allocation letter should be included to inform the shareholders about their new shares.
Previous share certificates are effectively cancelled after the issuance of new ones, ensuring that the company’s share records are accurate and up to date. This process maintains the integrity of the company’s share capital and ensures accurate documentation for shareholders.
Updating the confirmation statement
The final step in the share allotment process is updating the confirmation statement. This statement must reflect any changes in the company’s share structure post-allotment. It includes details about the new shareholders and any changes in the existing shares.
Updating the register of allotments is necessary to reflect the newly issued shares to shareholders. Accuracy and timeliness of the confirmation statement are crucial for maintaining transparency and legal compliance. Accurately updating all records completes the share allotment process.
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Types of Share Allotments
Share allotment can take various forms, each suited to different scenarios. One common type is the Initial Public Offering (IPO), which involves:
- A private company offering shares to the public for the first time.
- Companies use this method to raise significant capital.
- Broadening their investor base through public investment.
Another type is a rights offering, which allows existing shareholders to buy additional shares without obligation. This type of allotment helps shareholders maintain their proportional ownership.
Employee stock options (ESOs) are also a common form, used as incentives to attract and retain staff by allowing them to purchase shares at a predetermined price.
Benefits of Share Allotment
Share allotment offers several benefits to companies:
- It enables companies to generate necessary capital without risking their assets.
- This capital can be used for various purposes, such as funding new projects or paying off debts.
- Increasing the level of shareholders’ funds on the balance sheet can improve the company’s financial stability.
Existing shareholders often receive pre-emption rights, which:
- Allow them the first opportunity to purchase new shares before external investors
- Help them maintain their ownership percentage
- Protect their investment from dilution
Risks Associated with Allotment of Shares
While share allotment offers many benefits, it also comes with risks. One major risk is the dilution of existing shareholders’ ownership percentage. When new shares are issued, the value of existing shares may decrease due to the increased supply of shares. This can lead to a reduction in the overall value of the shareholders’ investments.
Additionally, if the company’s value decreases after share allotment, shareholders may incur losses. They might also find it challenging to sell their shares at a profit if the stock price falls below the price of the allotted shares.
Percentage dilution, value decrease and other potential risks must be carefully considered before proceeding with allotment of shares in the UK.
Legal Considerations in Allotment of Shares
The allotment of shares is governed by a robust legal framework, primarily the Companies Act 2006 in the UK. This act sets forth the legal requirements and procedures for share allotment. A formal resolution by the company’s board is required to ensure compliance with corporate governance norms and statutory requirements.
Companies must also adhere to disclosure requirements under the UK Listing Rules when allotting shares to the public. Maintaining accurate records and filing necessary documents with relevant authorities, such as Companies House, is essential for legal compliance regarding company issues.
Non-compliance with these legal procedures can lead to invalid allotments and potential legal repercussions for the company and its directors.
Impact on the Company’s Share Capital
Issuing new shares typically leads to an increase in the company’s total share capital, which can enhance its perceived financial strength among creditors and investors by indicating growth and stability. However, a higher number of shares in circulation may dilute the value of existing shares, potentially affecting returns for current shareholders. Despite this, companies often choose to issue new shares to raise capital without increasing their debt burden.
Preference shares, a type of equity that typically grants shareholders fixed dividends and priority over ordinary shareholders in the event of liquidation, can further strengthen a company’s financial position. They contribute to the company’s net worth, improve the debt-to-equity ratio, and increase borrowing capacity. Additionally, the nominal value of issued shares helps define the limited liability of shareholders in case the company becomes insolvent.
These factors must be considered when altering the company’s share capital through share allotment and the company’s shares.
Practical Tips for First-Time Investors
First-time investors should exercise caution and avoid investing large sums in unfamiliar shares. Consulting a financial advisor is highly recommended before making any share investments. This helps investors make informed decisions and mitigate risks.
For those participating in an Initial Public Offering (IPO), starting small in share allocations is advisable. This approach allows investors to introduce experience and understand market dynamics without significant financial risk.
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How Can Osome Help?
Osome offers a comprehensive plan that includes expert accounting, software, and bookkeeping services to assist companies with share allotment. For ecommerce businesses, Osome provides dedicated accountants, integrates with sales platforms, and manages international VAT returns. This can be particularly beneficial for businesses looking to streamline their financial operations.
Additionally, Osome assists with company formation by providing company registration services, a bank account, and a registered address. Their software supports business owners by managing bookkeeping, invoicing, and payment, along with other financial tasks.
Osome’s accountants specialise in small businesses, offering tailored financial advice and support to help them navigate the complexities of share allotment, for example, in managing their financial strategies.
Summary
In conclusion,share allotment is a powerful tool for companies looking to raise capital and attract new investors. By understanding the process, types, benefits, and risks associated with share allotment, companies and investors can make informed decisions. Ensuring compliance with legal requirements and maintaining accurate records is crucial for a successful share allotment process.
As you venture into the world of share allotment, remember that knowledge and careful planning are your best allies. Whether you’re a company director or a first-time investor, understanding the intricacies of share allotment will enable you to navigate this complex yet rewarding exercise with confidence.