• HDFC securities
• 10 Mar 2023
• Knowledge Centre

 

 

Shares are an integral part of any investment portfolio. As an investor, it is important to know the various aspects of the security you are investing your hard-earned money in. An equity share of a company is a representation of ownership. A company issues equity shares in order to raise funds while investors are entitled to the divided and voting rights by becoming equity shareholders. Moreover, the value of equity shares can increase with better performance of the company. Although there are several benefits of equity investments, it is necessary to know what are forfeited shares.

Forfeited Shares

Forfeited shares are shares that are cancelled by the issuing company. This usually happens when the shareholder fails to pay the necessary subscription money for the equity share. If a shareholder does not meet the requirements for being a shareholder, the shares can be forfeited. However, this is only applicable to companies that are listed on the stock exchanges.

In most cases, forfeited shares are a result of non-payment of the money required to subscribe to the issue. This amount is known as Call money. If the call money is not paid in due time, the investor loses all rights of a shareholder and the shares stand forfeited.

We can understand what is meant by forfeited shares with the help of an example.

If an investor wants to subscribe to an issue of shares, they will have to pay 25% of the face value at the time of subscription while the remaining 75% of the amount would be paid in 3 instalments. If the investor defaults on the second payment, the issuing company can forfeit the shares as well as the amount paid as call money.

There are many other reasons why shares can be forfeited. Firstly, if the sale or transfer of shares is restricted for a given period, the company can forfeit the shares.

Certain fully paid equity shares are issued to employees on the condition that they remain employed at the company issuing the shares for a certain period of time. Failure to do so can result in forfeiting shares.

The impact of forfeiting shares is immediate. The investor whose shares have been forfeited ceases to be a member of the company. His obligation to pay any future calls is also terminated. However, the shareholder is still liable to pay the unpaid call money to the company.

Reissue of shares that have been forfeited

In some cases, the issuing company can reissue previously forfeited shares. These shares can be issued either at a premium, at par or at a discount. Forfeited shares that are being reissued at a discount cannot be issued at an amount which exceeds the initial value of the forfeited shares. Once an investor purchases the forfeited shares, they become a shareholder of the company.

An investor should note that a company’s board of directors may cancel the forfeiture of shares at the request of the investor. However, once the shares have been forfeited, the investor loses all the rights as a shareholder and also the previously paid call money.