Pre-emptive Rights and Allotment of Shares

Pre-emptive rights are the rights of existing shareholders to purchase additional shares in a company before the new shares are offered to the public. The main purpose of these rights is to prevent the dilution of an existing shareholder’s interest in the company. In the context of allotment of shares, pre-emptive rights ensure that existing shareholders are given the first option to buy any new shares in the company before they are allotted to new shareholders.

Historical Fact: The East India Company and Allotment of Shares

Historically, the system of allotment of shares has evolved over centuries of business practices. A significant event in the history of share allotment was the formation of the East India Company in the early 17th century. The company had the distinction of being the first to issue shares to the public. The shares were made available to the public, and interested individuals would apply. The directors of the company would then allocate shares based on these applications. This is a basic form of the allotment process we see today.

Importance of Allotment of Shares

The allotment of shares is a significant phase in the life of a business. It determines the ownership structure of the company and influences how the company will be managed and controlled. An orderly and fair allotment process ensures that all interested parties have a fair chance of becoming part of the company. It reflects positively on the company’s governance and attracts more investors. Consequently, the allotment of shares directly impacts the company’s capacity to raise capital and grow its operation.The allotment of shares, therefore, is not just an administrative task but a strategic process that can tremendously influence a company’s future. It is of strategic importance, and companies should handle it meticulously to ensure equitable distribution of share ownership and successful capitalization.