What Is an Allotment Letter?

An allotment letter is a type of business document that provides key information on the number of shares or securities associated with a new issue that an investor may choose to claim, usually within a specified period of time. Typically, the document is presented in the form of a certificate and provides the recipient with several different options. The investor may choose to purchase the total number of shares allotted by the date identified in the document, authorize the issuer to re-allot those shares to a different shareholder, or even sell the rights to those share to the buyer of his or her choice, subject to the rights and privileges associated with those shares.

The purpose of an allotment letter is to advise shareholders of the number of shares currently being held by the issuer on behalf of the investor, and what options the shareholder has in terms of those shares. Trade regulations in effect in the nation where the shares are made available will often have some impact on both the overall detail included in the document and on the range of options open to the investor. Most commonly, the investor has up to a certain date to purchase all or part of the allotted shares, or allow them to be re-allotted to other shareholders. At times, the investor may specify another investor who may have the option to purchase those allotted shares. A third possible option is to exercise the right to sell those shares to another investor, usually allowing the shareholder to generate some small amount of profit from the arrangement.

The amount of time that an investor has to exercise the options contained in an allotment letter will vary, usually due to trade regulations and the company rules that govern the issuance of shares to investors. It is not unusual for letters of this type to be issued shortly before the shares identified in the allotment letter are registered, allowing the shareholder time to make a decision of whether to buy or to pass them on to someone else before the full registration is completed. In a sense, this gives the investor the first right of refusal, as well as providing the opportunity to secure the shares at competitive prices that may not be available once the shares enter into active trading.

The issuing company may use a number of different strategies when it comes to calculating the number of shares extended to an investor by means of the allotment letter. In some cases, the current percentage of issued shares held by the investor will have some impact. At other times, the number of shares involved in the new issue will be equally divided among all current shareholders without regard to how much of an interest those investors already hold in the business. As with the other provisions found in the letter, policies and procedures within the founding documents of the company operation as well as current trade regulations will often impact exactly how the quantity of shares offered to each investor is determined.