Introduction
A forfeited share is an equity share investment which is cancelled by the issuing company. A share is forfeited when the shareholder fails to pay the subscription money called upon by the issuing company.
Understanding Forfeited Share
A company can forfeit shares only when the Articles of Association of the company contain a provision for share forfeiture. A shareholder subscribing to the shares of a company owes the subscription price of the shares to the company. The company may call upon the shareholder to pay the price in instalments. The instalment payments are called call money. The call money is due from the shareholders. Non-payment of the dues can result in forfeiture of the shares.
To illustrate, if XYZ Ltd makes a public offer of equity shares at Rs 100 per share. Mr A subscribes to 1,000 shares of the company. He pays 25% of the face value at the time of subscription. The balance 75% is payable in three instalments. The first instalment is paid by Mr A. However, Mr A defaults on the payment of the second instalment. Upon such default, XYZ Ltd. is entitled to forfeit the shares of Mr A. Consequently, Mr A would lose the ownership of the 1,000 shares, and the money paid amounting to Rs. 50,000.
Factors to consider before you invest
A shareholder loses the ownership of the shares upon forfeiture of the shares.
Forfeited shares stand vested with the issuing company.
In the case of Employee Stock Option Plans, if an employee quits before the mandatory vesting period, the options are forfeited.
An investor loses the subscription money already paid in a case where the shares are forfeited. Hence, there are no capital gains upon forfeiture of the shares.
The shares forfeited can be reissued to another shareholder at a different price by the company. The forfeited shares are generally reissued at a discount to the issue price. This is because the company would have forfeited a portion of the issue price already paid on the shares earlier.
The shares generally include equity shares held in listed as well as unlisted companies.
