What is Pro-Rata?

Summary

Pro rata ensures an equitable distribution of shares, dividends, or expenses based on a set ratio. It is commonly applied in IPO oversubscriptions, guaranteeing fairness by allocating shares proportionally. While Pro rata is used in finance and investments Prorated typically refers to adjusting salaries, rent, or costs in business and daily transactions.

What Is Pro Rata?

It is a process where whatever is being allocated will be distributed in equal proportion like in the case of dividend distributed to investors based on their investment amount. The concept of Pro-rata is  rooted in fractions because proration attempts make two fractions equal to each other with different denominators. Basically Pro-rata means everyone gets their fair share.

How to Calculate Pro Rata?

The calculation of Pro-rata becomes quite essential at the time of oversubscription of a share. When a company receives oversubscription for its shares (generally during its IPO or right issue) the company adjusts the excess money received at the time of application firstly, towards the allotment and then towards calls and later refunds any surplus left after adjusting the amount towards allotment and calls to the applicants.

Here’s the Step-by-Step Calculation of Pro Rata Allotment

1. Determine the Oversubscription Ratio:

• The oversubscription ratio is the total shares applied for divided by the total shares available.

• Formula: Oversubscription Ratio=Total Shares Applied / Total Shares Available

2. Calculate the Pro Rata Allocation for Each Applicant:

• Each applicant receives shares based on the ratio of applied shares to total applied shares multiplied by the total shares available.

• Formula: Shares applied by investor / total share applied * total shares available

3. Round Down to the Nearest Whole Number:

• Since shares cannot be allocated in fractions, round down to the nearest whole number.

For Example:-

• Total Shares Available: 1,00,000

• Total Shares Applied For: 2,00,000

• Oversubscription Ratio: 2:1

Investor A's Application-

• Shares Applied: 5,000

• Pro Rata Allocation: 5,000 / 2,00,000×1,00,000=2500

• Final shares allotted = 2500

What is Pro rata share allotment formula?

Share allotted:- (Shares applied by investor / Total share applied ) * Total shares available

Why Pro Rata Works?

Pro rata allotment is a fair and systematic method to distribute shares when demand exceeds supply. It ensures that investors receive a proportionate allocation based on their application size. Here’s why it works:

• It prevents companies from favoring specific institutional investors

• It avoids share allocation randomly or on a first-come, first-served basis, which disadvantages smaller investors.

• It lets investors know that even in case of oversubscription, they will receive a fair share.

• Larger applicants receive more shares, but no single investor can dominate the allocation.

Let’s take another example of Pro Rata allotment:

A company issues 50,000 shares in an IPO, but investors apply for 1,00,000 shares (oversubscribed 2x). Since demand exceeds supply, shares are allotted pro rata based on application size.

Each investor received 50% share of they applied for.

What Is the Difference Between Prorated and Pro Rata?

The term Porated & Pro-Rata means the same thing, proportional.. They differ on the basis of their uses in different situations.

Pro-Rata is often used in finance, legal contracts, and investments to indicate fair distribution based on a fixed ratio.

• Example: Shares in an oversubscribed IPO are allotted on a pro rata basis.

Prorated is commonly used in day-to-day business and financial calculations, especially when dividing costs, salaries,or benefits for a partial period.

• Example: An employee’s first-month salary is prorated if they join mid-month.