Investing in stocks offers great rewards, but it is not without risks. Among them is the potential for forfeited shares, where companies cancel equity investments.
In this blog, we will explore everything about the Forfeited Share.
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What is a Forfeited Share?
A forfeited share refers to a publicly traded company share that an owner loss due to non-compliance with purchase obligations. It can include failure to pay allotted funds or selling shares during restricted periods. Once forfeited, the shareholder relinquishes any remaining balance and potential capital gains. These shares revert to the issuing company’s ownership.
How Does a Forfeited Share Work?
Forfeited shares are only possible if a company’s Article of Association includes provisions for it. Shareholders who subscribe to a company’s shares are obligated to pay the subscription price, which may be divided into installments known as call money. Failure to pay these dues can lead to share forfeiture.
Let’s take the example of ABC Ltd., offering equity shares at Rs. 100 each. Mr. Sen subscribes to 500 shares, paying 20% upfront and agreeing to pay the remaining 80% in three installments. While Mr. Sen pays the first installment, he defaults on the second. As a result, ABC Ltd. has the right to forfeit Mr. Sen’s shares. Consequently, Mr. Sen lost ownership of the 500 shares and the Rs. 27,000 he had already paid.
What are the Benefits of a Forfeited Share?
Forfeited shares offer several advantages to a company:
- The money received from forfeited shares can be utilized for various purposes, like funding development projects, enhancing the company’s financial position, and settling liabilities.
- Forfeited shares serve as a source of funds, enhancing a company’s financial flexibility and strength.
- If the company decides to reissue the forfeited shares, they can be sold at a premium above their face value. The additional funds received can be added to reserves and surplus, bolstering the company’s ability to invest in growth opportunities.
What are the effects of a Forfeited share?
Share forfeiture can have various effects on employees and companies:
- Forfeited shares result in the employee losing ownership rights, including voting and Loss of potential gains.
- It can affect financial ratios like EPS and ROE, which potentially impact investor confidence.
- Share forfeiture carries legal and tax consequences for both employees and companies.
- Employees may miss out on potential value appreciation if forfeited shares are expected to increase in worth.
- It can dilute existing shares, but retiring them can increase their value.
Conclusion
The company has the option to issue the shares forfeited to a different shareholder at a new price. This price is generally low compared to the issued price.
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