Over-Subscription and Pro-Rata Allotment

When the number of shares applied for exceeds the number of shares actually offered, the issue is said to be over-subscribed. A company cannot allot more shares than it has offered, so the excess applications must be dealt with in one of three ways, or a combination of them.

Option 1 — Full rejection. The company allots shares in full to the applicants it selects and simply refuses (and refunds) every other application in full.

Option 2 — Pro-rata allotment. Shares are allotted to every applicant, but in a fixed proportion smaller than what each applied for (e.g., an applicant for 150 shares might be allotted only 100, a ratio of 2 : 3, applied consistently across every applicant in that category). Since every pro-rata applicant has already paid application money on MORE shares than they are actually allotted, an excess application amount exists on the shares allotted to them; this excess is not refunded outright — it is adjusted against the allotment money due from those same applicants:

If, after this adjustment, the excess is still more than the allotment money due, the remaining surplus is refunded in cash instead of adjusted. …