Renounceable Letter of Allotment

When a company first comes to the JSE they usually offer a certain number of shares to the public as part of their effort to raise capital. This is called an initial public offer (IPO). If the company is very successful and the shares are reasonably priced, far more applications for these shares will be received by the company than they have shares available to sell. Investors then say they have been "over-subscribed".

The result of this is that the shares have to be "allotted" by the directors on some basis. Usually, this means that applicants will only get a percentage of the shares that they applied for, for example, 100 shares for every 500 applied for. Then, once the shares have been allocated, the company pays whatever excess money was raised back to the unsuccessful applicants. With a rights issue, existing shareholders are allotted new shares in direct proportion to their existing holding. They receive a "letter" which entitles them to take up those shares under certain conditions.

Those letters (called "renounceable nil paid letters of allocation" or just NPL's) themselves have a value and are often traded on the JSE alongside the company's shares for a few weeks until the take-up date. This is a letter sent to the prospective subscribers, that is, the existing holders of shares in the company in respect of which the offer is made, saying that a number of new shares have been allotted to them in proportion to their existing holding, free of payment (commonly called a bonus or scrip issue), or inviting the shareholder to subscribe by paying for some or all of the new shares provisionally allotted to them in proportion to their existing holding.

The offer gives a shareholder a right but not an obligation to subscribe for additional shares. In this situation, the shareholder may pay for the shares in full but the shares will not be issued until some time later when the offer to subscribe is closed.

The letter is commonly known as a Provisional Allotment Letter as the allotment of shares remains provisional until the shareholder has accepted the offer and paid for the new shares. If a shareholder decides not to take up the offer by the closing date, the allotment letter will lapse.

A public company will usually issue renounceable letters of allotment to its existing shareholders allowing them to subscribe for further shares. While the RLA remains provisional until such time the shareholder has accepted the offer and paid for the new shares, the letter has some value, as it provides the shareholder with the right to acquire new shares at below the current market price, or alternatively renounce, that is, sell, the rights to subscribe for the shares to a third party. Similarly, if a shareholder decides not to take up the offer at the end of the renunciation period, the allotment letter will lapse.

Drafting an Allotment Letter:

• it must be written like an official letter. it must be duly dated, stamped, and signed by the authorized person;

• it must include the number of shares allotted and the amount payable on the allotment;

• make sure to write it grammatically correct;

• it should include the due date and place of allotment money payment;

• it should contain the interest that will be charged on allotment money receiving after the due date;

• it should include the consequences of non-payment of the allotment money;

• it must include the reference number of the share application and the applied number of shares.

Update the register of members and register of allotments

It is good practice to update the register of members promptly as this is the primary evidence of who owns shares in the company – someone effectively becomes a shareholder when their name is entered into the register of members. However, in law the deadline for updating the register of members is two months following the board approving the allotment.

At the same time, the company should also update the register of allotments with details of each separate allotment of shares. Even if someone already has shares in the company, you’ll need to add a new line into the register of allotments to reflect the new shares you’ve issued to them.

Issue share certificates to those who have been allotted shares

Companies generally issue share certificates in respect of the shares allotted, and by and large it’s something that shareholders will expect the company to do.

An application for shares only becomes binding on a new shareholder when the company notifies him that it accepts the application As far as the requirements of the Companies Act apply, the share certificates should be issued within two months of the share allotment. Most companies will, however, want to issue share certificates a lot earlier than that.

This is because an application for shares only becomes binding on a new shareholder when the company notifies him that it accepts the application. Until that time, it’s entirely possible for the potential shareholder to withdraw the application, a situation the company will obviously want to avoid.

Show the new shares issued within the company’s accounts

You will need to liaise with your accountant to ensure that the new share allotments are correctly reflected in the company’s accounts for the period.

When the company issues new shares, it increases the level of shareholders’ funds shown in the balance sheet. Within the balance sheet itself, there is different treatment given to the total amounts raised in respect of the nominal value of shares and share premium.