The share that the issuing company takes back from the investors who failed to meet the financial obligations on the issued shares is known as forfeited shares. In simple terms, when any investor fails to pay subscription, the issuing company takes back the issued share and term them as forfeited shares. The concept of forfeited shares is crucial in understanding how companies manage shareholder contributions and maintain financial stability.
When shares are issued to investors, they may be offered on a partly paid basis, meaning that the investor is required to pay only a portion of the total share price upfront. The remaining is usually paid by the investors in installments or as asked by the company. Once a shareholder fails to make these payments, the company forfeits the shares allotted.
Understanding the concept with a hypothetical example:
XYZ Ltd. issued 10,000 shares to Mr. A at ₹100 each, requiring an initial payment of ₹30 per share and a remaining ₹70 per share. Mr. A paid the initial ₹300,000 but did not pay the ₹700,000 balance when called upon.
XYZ Ltd. issued a notice of forfeiture after the payment deadline passed. Since Mr. A did not respond, the company forfeited his shares.
The forfeited shares are canceled from Mr. A’s account. XYZ Ltd. can now reissue these shares to other investors to recover the unpaid amount. This process helps maintain the company’s financial stability.
For Shareholders:
- The shareholders will lose all the money paid for the subscription of the shares.
- All the ownership privileges attached to the shares are no longer applicable once a share is forfeited.
- The shareholders shall not expect any gain or profit from the shares provided by the company
- Forfeited shares may also lead to legal implications on the shareholders if the default was due to intentional neglect or fraud.
For Company:
- The ROE (Return on equity) and EPS (Earning per share) along with overall financial ratio of the company gets affected if the outstanding shares are reduced.
- The equity structure of the company also gets affected.
