Proportionate basis 

Proportionate basis 

When demand outpaces supply, investors and companies use various allocation techniques to disperse stocks or assets. The allocation on a proportionate basis is one of the most widely used techniques. This strategy guarantees that each investor will get a portion of the securities or assets in line with their investment based on overall demand. 

What is proportionate basis? 

A method of allocating shares or securities to investors in a new issue or offering based on the proportion of the total subscription that each investor has applied for is known as a proportionate basis. This technique ensures that every investor, regardless of the size of their investment, has an equal chance of obtaining shares to encourage fairness and openness in the allocation process. It is frequently employed when a shortage of securities is being sold or when their pricing or subscription levels differ. The proportionate basis ensures that each investor receives an allocation proportional to their contribution and is a fair and open way to distribute securities in an offering. 

Understanding proportionate basis 

Due to its tendency to encourage fairness and transparency in the distribution of resources, a proportionate basis is frequently chosen over other allocation strategies like a lottery or first-come, first-served. By using this strategy, investors are given an equal chance to take part in the offering regardless of the amount they contribute.  

 The distribution of dividends and other assets, such as shares in a merger or acquisition, can be done on a proportionate basis. In such circumstances, the allocation is done proportionately to the investor’s current holdings. In cases where demand exceeds supply, the proportional basis assignment technique is a fair and open manner of distributing stocks or assets. Based on the magnitude of each investor’s investment, it ensures they each get a fair part of the securities being provided. 

Usefulness of proportionate basis 

The proportionate basis helps distribute shares or securities in a new issue or offering for several reasons. 

  • By guaranteeing that every investor, whatever the size of their contribution, has an equal chance of getting shares, a proportionate basis encourages fairness and openness in the allocation process, promotes a level playing field, and helps prevent favouritism of particular investors. 
  • The proportional basis is a straightforward and effective technique to distribute securities. It is simple to use and comprehend because it doesn’t require intricate computations or arbitrary judgements. 
  • The proportionate basis can also be employed when there is a shortage of securities or when the prices or subscription levels of the securities being offered differ. Due to its adaptability, it is an approach that may be used in various situations.

Features of proportionate basis 

The proportionate basis approach for allocating securities in a new issue or offering has the following key features: 

  • Regardless of the magnitude of their investment, the proportionate basis method ensures that every investor has an equal chance of getting shares which encourages fairness in the distribution process and helps to avoid treating some investors preferentially. 
  • A straightforward and transparent approach to allocating securities is the proportionate basis method. It is simple to comprehend and put into practice because it does not call for intricate calculations or arbitrary judgements. 
  • The proportionate basis method, which does not involve time-consuming and expensive allocation, is an effective way to distribute securities. 
  • The proportionate basis approach can be applied in several circumstances, such as when there is a shortage of shares or when the prices or subscription levels of the securities being offered fluctuate. 

Example of proportionate basis 

An example of the proportionate basis method for allocating securities in a new issue could be when a company is issuing 500 shares in an initial public offering (IPO) and receives applications for 1,000 shares from investors.  

 According to the size of each investor’s application, claims will be distributed to them proportionally in this situation. The number of shares allotted to an investor who applied for 100 shares would be 50 (i.e., 100/1000 x 500).  

 A second investor who requested 200 shares would be given 100 shares (i.e., 200/1000 x 500) if they asked for 200 shares. This type of allocation ensures that each investor receives an equitable portion of the securities being offered based on the quantity of their investment. 

Frequently Asked Questions

An example of proportionate basis allotment is when an IPO is oversubscribed, an investor will receive shares proportional to the quantity they applied for about the overall demand.  

Pro rata and proportionate are two terms often used interchangeably, but they have slightly different meanings. Pro rata is a proportionate distribution based on a current ratio or percentage. For example, if a company offers its employees a pro-rata share of its profits, each employee would receive a portion of the profit based on the number of shares they own.  

 Proportionate, on the other hand, refers to a distribution proportional to the amount of something each party contributes. For example, if two people are splitting the cost of a pizza, a proportionate distribution would mean that each person pays for the exact amount of pizza they eat. In short, pro rata focuses on a current ratio, while proportionate focuses on the amount each party contributes. 

 

A portion of the shares is distributed to each investor by the amount they have requested about the overall demand for the shares, known as a proportionate allotment. 

The formula to calculate pro rata share is: 

(number of “true” items / maximum quantity possible) 

Pro rata, which means “in proportion” in Latin, is a word that refers to allocating value concerning things that can be precisely and unambiguously measured or quantified. Pro rata often refers to a distribution in which each party or individual gets their just share in proportion to the whole. Pro rata is sometimes referred to or used in references in North American countries as “prorated.”  

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