Pro-rata allotment of shares is made when there is :

Oversubscription of shares

The correct answer is option 2- Oversubscription of shares.

Pro-rata allotment of shares is made when there is Oversubscription.

There are instances when applications for more shares of a company are received than the number offered to the public for subscription. This usually happens in respect of shares issue of well-managed and financially strong companies and is said to be a case of ‘Over Subscription’. In such a condition, three alternatives are available to the directors to deal with the situation:
(1) they can accept some applications in full and totally reject the others;
(2) they can make a pro-rata allotment to all; and
(3) they can adopt a combination of the above two alternatives which happens to be the most common course adopted in practice.