Initial shares – how are they allotted !!!

© 2015 StocksAnalyser

We have discussed in one of the earlier posts that how companies decide on the number of shares to be issued while launching anIPO/FPO. But then there we had a question unanswered, “how companies decide on initial number of shares at the time of inception?”

To answer this question let us take the example of a company which decides to allot 10,000,000 shares at the time of incorporation.

There is nothing like a hard core rule for deciding this 10,000,000 shares. These shares are referred to as initial shares that are resulted from authorized share capital. Companies at the time of incorporation are required to define authorised share capital (mandatory provision under Companies Act 1985) which is the maximum amount (money value) of shares the company could offer to shareholders (including founders).

For example if a company declares $100,000,000 as their authorised share capital and X number of shares then this gives them price per share ($100,000,000/X). Now the question comes how to decide this X. There is no maximum limit on deciding this X. The minimum however is 1. The company should atleast have 1 share that could be allocated to the sole owner/founder of the company having the value of entire authorised share capital; or if company wishes to distribute the ownership in a group of stakeholders then they could come up with any random number – greater than 1 of course. This decision is based on factors like:

  1. What would be the price per share depending on various probable number of shares, so that shares are affordable later point in time when selling them to other shareholders?
  2. What share number should be decided for easy calculation of percentage of ownership (however this is of lesser importance)?

There has been quite a long history for small companies issuing 100 shares at the time of incorporation for the sake of second view mentioned above (for easy calculation, as 1 share would refer 1% of ownership).

So companies are free to decide on any number of initial shares. This follows with each company unless a provision of authorised share capital is stated in articles of association which is an optional clause that shareholders can include to restrict total number of shares that a company could issue.

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