What is Pro Rata?
When something is divided "pro rata," it indicates "following the relative value of the parts." Dividend payments and cash distributions from firms to their shareholders are the only examples of when pro-rata calculations may be helpful.
What Exactly does "Pro Rata" Stand for?
The insurance industry uses the pro rata method to calculate the premium for a policy that will only cover a portion of the policy term. Pro rata may also be used to allocate the appropriate share of an annual interest rate to a shorter period.
The term "pro rata" describes the distribution of benefits or money to investors depending on their relative stake in a business. Proration is the process of attempting to make two fractions with different denominators equal.
Proration may be used in numerous contexts, including distributing dividends or profits from a business partnership and invoicing and payment for services. To determine the pro rata share of a resource, one must divide the actual amount of that resource by its maximum allowable allocation. It is possible to use this ratio to determine the percentage of any similar object.
What are Fully Paid Shares?
For shares to be considered "fully paid," they must be issued with no outstanding balance owed by shareholders to the corporation. Shareholders must pay a predetermined price when a firm issues shares, initially or in a secondary issuance. Fully paid shares are those that the corporation has received from its shareholders.
What does It Mean When Shares are Fully Paid?
When the firm issues fully paid shares, the shareholder has no further obligation to the company to pay any portion of the value of the shares. There is a distinction between fully paid and partly paid shares, in which the corporation has only received a fraction of the market value.
Why is Pro Rata Useful?
Because the percentage of one good is imposed on another, the mathematical idea of pro rata is valid. The term "pro rata" refers to the practice of representing a portion of one object using a different foundation.
Pro Rata Usefulness
Pro rata stems from equivalent fractions with varying denominators. For example, in the previous illustration, the fraction 79/365 is equivalent to the proportion 2,164/10,000 (Ignoring rounding variances). That's why all you have to do to calculate pro rata is take a fraction and get its equivalent with a specified denominator. To put it another way, pro rata is an effort to find a numerator that will make two fractions equal under certain conditions.
So, let's say you and a pal want to divide up four slices of pizza equally. If the pizza is cut into pieces and you and your friend split it evenly, you would get half each. This pro rata example looks for the fraction with a denominator of 4 equal to 1/2. Two slices for each of you, so 2/4 Equals 1/2.
Fully Paid Shares vs Partly Paid Shares
Fully paid shares are average. Investors pay the total share price. However, a company may issue unpaid or partly paid shares if a shareholder requires time to obtain cash but agrees to a payment plan. In addition, startups may find it more convenient to issue unpaid shares. Only when there are strong commercial reasons are partly paid shares offered to a shareholder. For example, a corporation may give shares to a strategically aligned partner who doesn't have the money to pay for them all at once.
Difference Between Fully Paid and Partial Shares
Usually, the shareholder and firm agree when the company may demand payment. The corporation may then issue partially paid shares with a payment plan. After receiving the balance, partly paid shares become fully paid.
Fully paid and partially paid shareholders have the same rights, including:
Right to receive dividends
Right to vote at shareholder
Right to participate in the company's dissolution
Shareholders' dividend rights are proportional to what they've previously paid. A shareholder with partially paid shares has the same vote as one with fully paid shares in a show of hands meeting (one vote per share).
Conclusion
Pro rata implies everyone receives their portion. Investors get dividends pro-rata depending on their investment. Proration, which equalises fractions with different denominators, is the origin of pro rata. Prorating applies to bills, tips and business partnership income. It is calculated by dividing the item instance by its maximum amount. Any related object may be proportioned using this ratio.
However, a partly paid share is a corporation share that has been partially paid. Investors may acquire these shares at a discount. Company calls allow instalments for partially paid shares.
FAQs on Pro Rata and Partly Paid-Up Securities Premium
1. What is meant by pro-rata allotment of shares in company accounts?
Pro-rata allotment is a method used by companies when an issue of shares is oversubscribed, meaning applications are received for more shares than are available for issue. Instead of rejecting excess applications, the company allots shares to all applicants in a fixed, proportional ratio. For example, if a company offers 50,000 shares and receives applications for 75,000 shares, it may allot shares in the ratio of 2 shares for every 3 applied for. The excess application money received is then typically adjusted against the amount due on allotment.
2. What is the difference between partly paid-up and fully paid-up shares?
The key difference lies in the amount paid by the shareholder against the nominal (face) value of the share.
- Partly paid-up shares are shares where the shareholder has paid only a portion of the nominal value, and the company is yet to call for the remaining amount.
- Fully paid-up shares are those for which the shareholder has paid the entire nominal value. The company cannot call for any further payment on these shares.
3. How is Securities Premium treated in accounting for share capital?
Securities Premium is the amount a company receives over and above the face value of a share. It is a capital profit and must be credited to a separate account called the 'Securities Premium Reserve Account'. As per Section 52(2) of the Companies Act, 2013, this amount cannot be treated as regular profit. It can only be used for specific purposes, such as:
- Issuing fully paid bonus shares.
- Writing off preliminary expenses of the company.
- Writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures.
- Providing for the premium payable on the redemption of debentures or preference shares.
- For the purchase of its own shares (buy-back).
4. How does pro-rata allotment work with an example?
Let's assume a company issues 20,000 shares of ₹10 each. It receives applications for 30,000 shares. The application money is ₹3 per share. The company decides on a pro-rata allotment.
Calculation:
- Total Application Money Received: 30,000 shares × ₹3 = ₹90,000
- Application Money Required for Allotted Shares: 20,000 shares × ₹3 = ₹60,000
- Excess Application Money: ₹90,000 - ₹60,000 = ₹30,000
5. Why would a company choose pro-rata allotment instead of just rejecting excess applications?
Companies opt for pro-rata allotment for several strategic reasons. Firstly, it helps in creating a wider and more diverse shareholder base, as it avoids disappointing a large number of potential investors by rejecting them outright. Secondly, it maintains goodwill and investor interest for future capital-raising activities. Finally, it can be administratively simpler to adjust excess money against future calls rather than processing refunds for thousands of applicants, especially in a large public issue.
6. What happens to the Securities Premium if a shareholder fails to pay call money on partly paid-up shares issued at a premium?
The accounting treatment depends on whether the premium amount has been received or not.
- If the Securities Premium has been received (e.g., it was due with allotment money, which the shareholder paid), the premium amount is not reversed upon forfeiture of shares. It remains in the Securities Premium Reserve Account as per law.
- If the Securities Premium has not been received (e.g., it was due with allotment money, which the shareholder failed to pay), the Securities Premium Reserve Account must be debited at the time of forfeiture. This is done to cancel the premium that was recorded as 'due' but never actually collected.
7. How are 'Calls-in-Arrears' on partly paid-up shares and 'Securities Premium' shown in a company's Balance Sheet?
In the company's Balance Sheet, as per Schedule III of the Companies Act, 2013, these items are presented as follows:
- Securities Premium: This is shown on the 'Equity and Liabilities' side, under the major head 'Shareholders’ Funds' and the sub-head 'Reserves and Surplus'.
- Partly Paid-up Shares & Calls-in-Arrears: Under the same 'Shareholders’ Funds' head, the sub-head 'Share Capital' is detailed in the Notes to Accounts. Here, the amount called up on shares is shown. 'Calls-in-Arrears' is shown as a deduction from the 'Subscribed but not fully paid-up capital' to arrive at the final figure for paid-up capital.
