Forfeited Share

Forfeited Share — Meaning, Definition & Full Explanation

A forfeited share is an equity share that has been cancelled by a company because the shareholder failed to pay the required subscription amount, known as call money. When shares are issued, shareholders are required to pay either the full price upfront or in scheduled instalments. If any payment is missed, the company can forfeit the shares.

What is Forfeited Share?

A forfeited share arises when investors do not comply with payment obligations connected to their equity shares. Companies typically issue shares at a certain price, and shareholders are expected to make payments either in full or in part, as stipulated in the share issuance process. Call money refers to the portion of share capital that the company requests shareholders to pay at specific intervals. If a shareholder fails to meet these payment deadlines, the company has the right to cancel, or "forfeit," their shares. This mechanism serves as a way for companies to maintain financial discipline among shareholders while also providing a means to recover unpaid capital. The forfeited shares can later be resold, which can help the company attract new investors or stabilize its financial standing.

How Forfeited Share Works

1. Share Issuance: A company issues equity shares at a designated price, setting forth payment schedules.
2. Subscription by Investor: Investors subscribe to the company's shares and commit to paying the subscription amount, known as call money.
3. Payment Regime: Shareholders must pay the subscription amount either in full or in specified instalments.
4. Payment Default: If a shareholder fails to make any required payments by the due date, the company can initiate the share forfeiture process.
5. Issuance of Notice: The company typically issues a notice to the defaulting shareholder regarding the pending payment.
6. Forfeiture Decision: If the payment is not received within the stipulated time, the company officially forfeits the shares, reclaiming ownership and nullifying the shareholder’s rights.
7. Resale of Forfeited Shares: The company may reissue or sell the forfeited shares to raise capital, often at a discount to attract new investors.

This process helps safeguard the financial interests of the company and maintains the integrity of its capital structure.

Forfeited Share in Indian Banking

In India, the framework governing forfeited shares primarily falls within the Companies Act, 2013. Under Section 62, companies are permitted to forfeit shares if a shareholder fails to pay the call money as required. The Registrar of Companies (RoC) oversees this process. Additionally, the Institute of Chartered Accountants of India (ICAI) sets guidelines regarding the treatment of forfeited shares in financial accounts.

For instance, companies like SBI or HDFC Bank may issue shares with stipulated call money requirements, and if shareholders default, the shares can be forfeited as per the regulatory guidelines. This concept may also appear in the syllabus for banking exams such as JAIIB and CAIIB, particularly in sections concerning company law and corporate finance.

Practical Example

Rohit, a software engineer in Bangalore, decides to invest in ABC Technologies Ltd, which has issued equity shares at ₹200 each. He subscribes to 1,000 shares and pays 25% upfront, amounting to ₹50,000. The remaining ₹150,000 is due in three instalments of ₹50,000 each. When Rohit misses the payment deadline for the first instalment, ABC Technologies sends a payment reminder. Failing to comply, the company proceeds to forfeit his shares. As a result, Rohit not only loses his previous investment but also forfeits ownership in the company. The forfeited shares are then reissued by ABC Technologies to new investors at a price of ₹150 each, effectively minimizing the impact of the default on the company’s financial standing.

Forfeited Share vs Paid-Up Share

Feature	Forfeited Share	Paid-Up Share
Payment Status	Payment not made	Payment fully made
Shareholder Rights	No rights post-forfeiture	Full rights to dividends and voting
Treatment in Accounts	Treated as lost capital	Recognized as equity capital
Reissue Capability	Can be reissued to new investors	Cannot be reissued since fully paid

Forfeited shares are one category that indicates a default in payment obligations, while paid-up shares signify complete ownership and payment fulfilment. Understanding the distinction helps in managing investment risks.

Key Takeaways

• A forfeited share is an equity stake revoked due to non-payment of call money.
• Call money refers to the unpaid portion of the subscription price for shares.
• Companies must follow regulations under the Companies Act, 2013, regarding share forfeiture.
• Shareholders forfeit all rights upon cancellation of their shares.
• Companies can resell forfeited shares to reclaim some lost capital.
• Forfeited shares may be issued at discounted rates to attract new investors.
• The process of forfeiture provides companies with a mechanism to enforce shareholder accountability.
• Forfeited shares can impact the capital structure and financial stability of the issuing company.

Frequently Asked Questions

Q: What happens to dividends on forfeited shares?
A: Once shares are forfeited, the shareholder loses all rights, including any potential dividends on those shares. The company is no longer obligated to pay any declared dividends on forfeited equity.

Q: Can forfeited shares be sold back to the original shareholder?
A: Typically, forfeited shares cannot be sold back to the original shareholder since the shares have been cancelled and the rights have been extinguished. The company may issue new shares to new investors.

Q: Are forfeited shares considered a loss?
A: Yes, forfeited shares represent a financial loss for the original shareholder as they lose both their investment and ownership in the company. It indicates a failure to comply with financial commitments associated with the shares.