Meaning of Pro Rata Allotment
The word "pro rata," which comes from Latin and means "per the rate" or "proportionally," is usually used when somebody pays or fees a specific amount based on how much they have to do with a business or service. The pro rata allotment forfeiture and reissue are easy for figuring out short-term or partial profits and payouts, mainly if you only realise the final payment or fee.
Defining the Meaning of Pro-Rata Allotment
Share forfeiture: We all know that if a company doesn't pay its calls, this can lose its shares. Before the company can take away an investor's shares, it must give them a clear 14-day notice that the money owed plus interest is due. The shares will be lost if the money isn't paid by the date shown. When a company makes pro-rata allotments, it gives out the lost shares at face value or a higher price.
Forfeiture and Reissue of Shares Type
The entry for forfeiture of shares that have been given initially out on a pro-rata basis is identical to that for normal allotment. The only difference is that the forfeited shares account is credited with the application money obtained from pro-rata allottees based on the number of shares they applied for. The share allotment account is also credited with the sum not received from pro-rata allottees after adjusting allotment cash received in advance.
Share reissue: The company is selling shares the court has taken away. After shares are lost, the company has to get rid of them. For the company to re-issue lost shares, its Board Meeting must pass a resolution. Re-issuing lost shares is just another way for the company to sell shares. A firm does not give out these shares.
The situation of pro-rata-based forfeiture and reissue of shares type occurs:
Shares were lost and reissued at a discount when they were first issued at par.
If shares were first issued at par, they could be reissued at par or a premium.
Forfeited shares are reissued at par, at a discount, or at a premium after being first issued at a premium.
Forfeited shares initially sold at a discount were reissued at par, at a discount, and at a premium.
Examples of Pro Rata Allotment
Suppose anybody buys an insurance policy that is quoted at a specific price for a full year of coverage and only signs up for half a year. In that case, they will pay the insurance firm on a pro-rata rate basis, which would come out to half the entire policy. It would be because they only had coverage for half as many days as the total list price said they would. Whereas if the procedure costs INR 5000 for the whole year, the buyer will pay INR 2500 in insurance premiums based on how much time is left in the year.
Some shareholders may not be able to pay some or all of the payments, which can be allotment cash or call money. When this happens, the shares are forfeited. In this case, the firm can revoke the shares' allotment by forfeiting them.
After the shares are lost, the company can give them out again. This is called "re-issuing forfeited shares" or "re-issuing shares." For pro-rata allotment forfeiture and reissue, the company can put the shares up for auction and sell them. The shares can be reissued at any cost; a rule says the total money made from shares should not be below the share price held in arrears.
Practical Question Solved
On June 1st, 2018, Arihant Ltd. Co. issued 100,000 equity shares with a face value of 10 each at a 20% premium. Listed below are the terms of payment:
June 1st, 2018: On Application ₹2
July 1st, 2018: On Allotment including Premium ₹7
September 1st, 2018: On the First and final call ₹3
The company receives applications for 285000 shares. As such, it handles them as follows:
The entire 25000 share allocation is given to those who apply for it.
On a pro-rata basis, each applicant for 225,000 shares will get one for every three requested shares.
The requests for 35,000 shares are denied.
The company receives the total amount as it should. Make the appropriate entries in the journal.
Journal Entries in the Books of Arihant Ltd
Conclusion
Any time a pro-rata payment is needed, the way to figure it out is the same, even if the situation details differ. In accounting, this implies that income, expenses, assets, debts, and other things are split up among the group members fairly. A participant can be a person or a group. The Pro-rata term can be used in several situations, such as when a business is sold and the money is split among the common shareholders depending on how many shares each person owns.
FAQs on Pro Rata Allotment: Meaning and Process
1. What exactly is pro-rata allotment of shares as per the CBSE Class 12 syllabus?
Pro-rata allotment is a method of issuing shares when an Initial Public Offering (IPO) is oversubscribed. This means the company receives applications for more shares than it has offered to the public. Instead of rejecting excess applications outright, the company allocates shares to applicants in a fixed, proportional ratio. For instance, if a company offers 10,000 shares but receives applications for 20,000, it might allot one share for every two shares applied for.
2. Under what circumstances does a company typically use pro-rata allotment?
A company resorts to pro-rata allotment primarily during a situation of oversubscription of its shares. When the reputation of a company is strong, and investor demand is high, the number of shares applied for by the public often exceeds the number of shares available for issue. Pro-rata allotment provides an equitable way to distribute the limited shares among a larger pool of interested investors, ensuring wider participation rather than a first-come, first-served or lottery system.
3. What is the standard formula to calculate the number of shares allotted on a pro-rata basis?
To calculate the number of shares an individual applicant receives under pro-rata allotment, you can use the following formula:
Number of Shares Allotted = (Total Number of Shares Offered / Total Number of Shares Applied For) × Number of Shares Applied for by the Applicant
This formula ensures that every applicant in a specific category receives shares in direct proportion to the number of shares they originally requested.
4. How is excess application money treated in a pro-rata allotment scenario?
When shares are allotted on a pro-rata basis, applicants pay application money for more shares than they are actually allotted. This excess application money is typically handled in two ways, as per the company's policy:
- Adjustment Against Future Calls: The most common method is to adjust the excess money towards the amount due on share allotment, and if any surplus still remains, it can be adjusted against future calls (like the first and final call).
- Refund: If the excess application money is more than the total amount due on allotment and subsequent calls, or if the company's Articles of Association mandate it, the remaining excess amount is refunded to the applicants.
5. What is the key difference between pro-rata allotment and full allotment?
The key difference lies in how share applications are handled relative to the shares available. In full allotment, every applicant receives the exact number of shares they applied for; this is only possible when the issue is exactly subscribed or undersubscribed. In contrast, pro-rata allotment only occurs during oversubscription and involves applicants receiving a smaller, proportional number of shares than they applied for, based on a fixed ratio.
6. How do journal entries for share forfeiture differ in a pro-rata case compared to a normal allotment?
The primary difference in the journal entry for forfeiture in a pro-rata case lies in calculating the amounts for the 'Share Forfeiture Account' and 'Calls-in-Arrears'. In a pro-rata scenario, you must account for the excess application money that was already adjusted against the allotment. Therefore, the amount of 'Calls-in-Arrears' on the allotment is the allotment money due less the excess application money already received and adjusted. Consequently, the 'Share Forfeiture Account' is credited only with the amount actually received and retained by the company from the shareholder before forfeiture.
7. Why is it important for a company to adjust excess application money against allotment and calls?
Adjusting excess application money serves two critical purposes. Firstly, it is an equitable and fair practice that honours the investor's intent to invest a certain amount of capital. Secondly, from the company's perspective, it is a practical way to secure funds for subsequent calls (like allotment and call money) in advance. This reduces the administrative burden of refunds and subsequent collections and minimises the risk of future calls-in-arrears, ensuring smoother capital collection for the company.
8. Can you explain pro-rata allotment with a simple real-world analogy?
Certainly. Imagine a popular new bakery opens and plans to give away 100 free cupcakes (the 'shares offered'). However, 200 people show up, each wanting one cupcake (the 'shares applied for'). Instead of giving the first 100 people a full cupcake and leaving the rest with nothing, the bakery decides on a pro-rata basis. It cuts each cupcake in half and gives every one of the 200 people half a cupcake. In this analogy, the allotment ratio is 100 cupcakes / 200 people, or 1/2 cupcake per person. This is the essence of pro-rata distribution: everyone gets a proportional share of what's available.
