Forfeited Share
A forfeited share is a share that is surrendered (forfeited) by a shareholder as a penalty for violating the company’s rules or regulations, such as failing to pay dividends or other financial obligations on time.
Reasons for forfeiture:
- Non-payment of dividends or other financial obligations
- Violation of company’s rules or regulations
- Transferring shares without authorization
- Insider trading
- Manipulation of company’s securities
Procedure:
- Notice of forfeiture: The company will issue a notice of forfeiture to the shareholder, outlining the reason for forfeiture and the specific shares that are being forfeited.
- Forfeiture: The company will record the forfeiture of the shares in the company records.
- Resale or cancellation: The company may resell the forfeited shares or cancel them altogether.
- Refund or distribution: If the forfeited shares are resold, the proceeds from the sale will be refunded to the shareholder or distributed to other shareholders as directed by the company’s bylaws.
Example:
A shareholder fails to pay their dividends on time. As a result, the company issues a notice of forfeiture and forfeits the shareholder’s shares. The forfeited shares are then resold, and the proceeds are refunded to the shareholder or distributed to other shareholders.
Note:
- The specific rules and procedures for forfeiture may vary depending on the company.
- Forfeited shares are usually sold in the open market or through a private sale.
- The company may impose a penalty or fine on the shareholder for forfeiting their shares.
FAQs
What is meant by forfeiture of shares?
Forfeiture of shares occurs when a shareholder fails to pay the required call money, resulting in the company taking back the shares. The shareholder loses ownership rights, and any amount paid on these shares may be retained by the company.
Why are shares forfeited?
Shares are typically forfeited if a shareholder does not pay due installments (calls) on time. This is done to enforce payment discipline and maintain financial stability within the company.
How are forfeited shares treated in the balance sheet?
In the balance sheet, the amount received from forfeited shares is shown under “Share Capital.” Any profit on reissuing forfeited shares is recorded as “Capital Reserve” in the balance sheet.
Can forfeited shares be reissued?
Yes, forfeited shares can be reissued by the company, usually at a price below the original issue price. The reissue must comply with company policies and legal requirements, and any profit from reissuance is transferred to a capital reserve account.
Can forfeited shares be canceled?
Yes, companies have the option to cancel forfeited shares instead of reissuing them. This reduces the total number of shares in circulation and adjusts the share capital accordingly.
