What are Forfeited Shares and How are They Reissued?
9 November 2022
Forfeited shares are shares revoked by the share issuing company when the shareholder fails to meet the terms and conditions mentioned in the purchase agreement. In most cases, forfeiture of shares happens when the shareholder fails to pay the subscription amount to the issuing company. That being said, there could be other reasons for forfeiture of shares too.
So, if you have just started investing in shares, this blog is for you. Keep scrolling to understand the effects of forfeiture of shares.
What are Forfeited Shares?
When you buy shares from a company but fail to meet or neglect their purchase agreement, your shares could be forfeited. Once forfeited, you would no longer be considered the owner of the shares.
Forfeiture of shares mostly occurs when shareholders fail to pay the call money or the instalment amount to the share-issuing company. Another reason for share forfeiture could be employees having Employee Stock Ownership Plan (ESOP) quitting the company before the vesting period.
Once your shares are forfeited, you won’t be earning capital gains or dividends. However, the balance amount you owe to the issuing company would be revoked upon forfeiture of shares.
Example of Forfeited Shares
Consider the following example of forfeiture of shares to understand its working principle:
Company A makes a public offer of its equity shares for Rs.100 per share (face value). Mr Kumar subscribes 1000 shares from Company A. At the time of subscription, he has to pay 25% of the shares’ face value. The rest, 75%, which he owes to the company, can be paid in instalments.
Mr Kumar pays the first instalment in time. However, he cannot make arrangements for second and third instalments. Before every instalment, Company A makes a call for advance payments. As he is unable to pay the pending amount, Company A forfeits the shares of Mr Kumar.
Thus, he loses all his shares and the sum of money paid as a subscription.
Forfeiture of shares is done according to vesting schedules. Any company that tends to forfeit shares must follow at least one of the following two vesting schedules.
No shares are vested to an employee during the first few years. After 3 years of service, the employee receives 100% vesting of shares. However, if this employee quits after the second year, all of his/her shares are forfeited.
From the end of 2nd year, employees can vest 20% of their shares until 100% are vested over 6 years. As a result, if they quit after the 2nd year, they can keep the 20% of shares. The remaining 80% will be forfeited shares.
Before forfeiting shares, companies notify the shareholders twice for the call money or the instalment amount. If any shareholder cannot pay the instalment amount within the last due date, companies forfeit their shares. These forfeited shares now become a liability that companies can reissue at lower rates.
Forfeiture of shares is quite a loss for investors. Therefore, to avoid such a scenario, investors are required to make an informed decision before buying company shares.
Q1. What is the meaning of call money?
Ans. Call money refers to a short-term financial loan with interest payable at once whenever the lender demands it.
Q2. What is Vesting?
Ans. An employer can contribute or “vest” a portion of your money, ownership, or other assets to an employee’s retirement. Vested shares are granted over a pre-determined period, after which the employees can acquire their rights.
Q3. What happens after my shares are forfeited?
Ans. When shares face forfeiture, the defaulter loses their ownership of the shares and membership in companies. This means the shareholder will no longer receive dividends or capital gains.
Q4. How is forfeiture of shares different from surrender?
Ans. In case of forfeiture, issuing companies revoke their shareholders’ ownership when they fail to pay required instalments. In contrast, the shareholders themselves surrender shares if they cannot pay back the call money by a certain due date.
Q5. Why do companies reissue shares?
Ans. After a company forfeits shares, it becomes its liability and must be disposed of soon. Therefore companies pass a resolution through their board of directors to reissue shares. Unlike usual allotment, these forfeited shares are reissued like a sale or auction.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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