Introduction to Forfeited Shares
A forfeited share is an equity share investment cancelled by the issuing company due to the shareholder's non-payment of the required subscription money (call money). When a company issues shares, shareholders must pay the subscription price as a whole or in instalments. If a shareholder fails to pay the call money, the company can forfeit (cancel) the shares.
Understanding Forfeited Shares
Conditions for Share Forfeiture:
- A company can forfeit shares only if its Articles of Association (AOA) include a forfeiture clause.
- The shareholder must be duly notified of the unpaid call money before forfeiture.
- Once forfeited, the ownership of the shares reverts to the company.
Example of Share Forfeiture
XYZ Ltd offers equity shares at ₹100 per share. Mr A subscribes to 1,000 shares and pays 25% upfront (₹25,000). The balance ₹75,000 is payable in three instalments.
- Mr A pays the first instalment but defaults on the second instalment.
- XYZ Ltd has the right to forfeit the shares of its Articles of Association.
- Upon forfeiture, Mr A loses ownership of the 1,000 shares and forfeits the ₹50,000 already paid.
- The company can now reissue the forfeited shares to new investors.
Key Considerations for Investors
- Loss of Ownership – Once forfeited, the shareholder permanently loses rights to the shares.
- Company Retains Forfeited Shares – The issuing company controls the forfeited shares.
- Forfeiture in Employee Stock Options (ESOPs)—Unvested stock options are forfeited if an employee resigns before the vesting period.
- No Capital Gains for Investor – The subscription money paid is lost, meaning there are no financial returns upon forfeiture.
- Reissuance of Forfeited Shares – The company can reissue forfeited shares to new investors—usually at a discount since part of the issue price has already been collected.
Conclusion
Forfeited shares are a financial risk to investors because when a company defaults on call money, the shareholders lose ownership and forfeited capital. Companies benefit by reacquiring and selling forfeited shares, usually at a discount, to attract new investors.
