Oversubscription of Shares: Pro-rata Allotment

A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,000 and is divided into 10,000 units of ₹100 each. Each unit of ₹100 will be called a share. To easily identify the shares, it is essential to give them numbers. The share of a company is moveable in nature and can be moved through the process stated by the Articles of Association of the Company. 

According to Indian Companies Act, 2013, “Shares means shares in share capital of the company and includes stock except where the distinction between stock and share is expressed or implied.”

Oversubscription of Shares:

It is possible that a company receives applications for more shares than the shares offered to the public for subscription. This kind of situation is known as an Oversubscription. It is usual that the shares of a sound and well-managed company get oversubscribed. However, a company cannot allot more shares than it has offered to the public for subscription. At times of oversubscription of shares, a company has three alternatives, among which pro-rata allotment is one of them. 

1. Full amount of Excess Money Refunded:

At times of oversubscription of shares, sometimes a company does not adjust the excess money received towards the allotment money and call money. In this case, the excess money received is refunded to the applicants. 

Journal Entries:

1. When excess application money is received:

2. When application money is adjusted:

Illustration:

Vijay Ltd. invited applications for 20,000 shares @ ₹20 each payable as follows:

₹8 on Application

₹3 on Allotment

₹4 on First Call

₹5 on Second & Final Call

The company received applications for 25,000 shares. Excess money received on the application was refunded. All the money was duly received except the call money on 600 shares. Pass the necessary Journal Entries.

Solution:

2. Full amount of Excess Money Adjusted with Allotment:

At times of over-subscription of shares, sometimes a company adjusts the excess money on allotment. After adjusting the excess money to allotment if there is still excess money left, it is refunded to the applicants.

Journal Entries:

1. When excess application money is received:

2. When application money is adjusted:

Illustration:

Akanksha Ltd. invited 40,000 shares @ ₹10 each payable as:

₹4 on Application

₹2 on Allotment

₹3 on First Call

₹1 on Second & Final Call

The company received applications for 70,000 shares, and a pro-rata allotment was made to all the applications. The excess money left after adjusting on allotment is refunded. All the money was duly received. Pass the necessary Journal Entries in the books of Akanksha Ltd. 

Solution:

3. Excess amount Adjusted with Allotment and Calls with Interest on Calls in Advance:

At times of oversubscription of shares, sometimes a company adjusts the excess money on allotment and calls. And for the calls received in advance, it pays the applicants Interest on Calls in Advance. 

Journal Entries:

1. When excess application money is received:

2. When application money is adjusted:

Illustration:

Sayeba Ltd. was registered with 50,000 shares @ ₹10 each. It invited applications for 40,000 shares payable as follows:

₹3 on Application (on 1^st January 2021)

₹1 on Allotment (on 1^st Feb 2021)

₹2.5 on First Call (on 1^st May 2021)

₹3.5 on Second & Final Call (on 1^st July 2021)

The applications were received for 60,000 shares, and the allotment was made as follows:

To Applicants for 20,000 shares: Full

To Applicants for 30,000 shares : 20,000

To Applicants for 10,000 shares: Nil

Excess money received on applications was utilised towards allotment and subsequent calls. Interest is paid on Calls in Advance @ 12% per annum. Pass necessary journal entries assuming all the money was duly received. 

Solution:

Calculation of Interest on calls in advance:

 ₹40,000 for 3 months

= 1200

Note: Interest on Calls in Advance is always calculated from the date of allotment in case any advance amount is received on the application.

4. Over-subscription of Shares issued at Premium with Pro-rata Allotment:

At times of over-subscription of shares at a premium, sometimes a company adjusts the excess money by making pro-rata allotment. 

Journal Entries:

1. When excess application money is received:

2. When application money is adjusted:

Illustration:

Rishab Ltd. was registered with 40,000 shares @ ₹10 each and 10% premium. It invited applications for 30,000 shares payable as follows:

₹3 on Application

₹2 on Allotment (including premium)

₹2 on First Call 

₹4 on Second & Final Call 

The applications were received for 70,000 shares and the allotment was made as follows:

To Applicants for 15,000 shares: Full

To Applicants for 40,000 shares : 15,000

To Applicants for 15,000 shares: Nil

Excess money received on applications was utilised towards allotment and subsequent calls. Pass necessary journal entries assuming all the money was duly received. 

Solution: