Forfeited Shares

Forfeited shares are shares that a company takes back when a shareholder does not meet payment requirements or other conditions provided in the company’s Articles.

• A shareholder can lose ownership, voting rights, dividend rights, and the amount already paid on forfeited shares.
• The shareholder may still remain liable for money that was due when the shares were forfeited.
• A company may reissue forfeited shares according to applicable rules and the terms permitted under its Articles.
• Forfeiture involving employee stock benefits may also occur when applicable vesting or other scheme conditions are not met.
   

Forfeited shares are shares that a shareholder loses when they do not meet the conditions attached to those shares. A common reason is failure to pay call money when it becomes due.
When shares are forfeited, the shareholder stops being a member of the company in respect of those shares. They also lose the amount already paid on them.
However, forfeiture does not necessarily remove the shareholder’s liability for unpaid amounts that were due at the time of forfeiture.
The company may later reissue or otherwise dispose of the forfeited shares according to its Articles and applicable requirements.
 

Share forfeiture can happen when a shareholder does not pay the required amount on allotted shares within the specified period. The company can then take steps to forfeit those shares according to its Articles.

For example, suppose Priya subscribes to 500 shares at an issue price of ₹50 per share.

• Total amount payable: ₹25,000
• Amount initially paid: ₹6,250

• Remaining amount: ₹18,750

  
  

If Priya does not pay the remaining ₹18,750 as required and the company completes the applicable forfeiture process, she can lose her rights over those 500 shares and the amount already paid.

Share-related benefits offered to employees can also be lost when employees fail to meet the conditions of an Employee Stock Option Plan (ESOP) or another employee share scheme.
For example, an employee may lose unvested options or share-based benefits if they leave the company before completing the required vesting period.
This is different from the forfeiture of allotted shares because of unpaid call money. In employee schemes, the outcome depends on the specific vesting and scheme conditions.
 

Suppose ABC Ltd. issues 10,000 shares at ₹75 each. The payment schedule is:

Now, suppose an investor receives 50 shares.

• Application payment: 50 × ₹20 = ₹1,000
• Allotment payment: 50 × ₹15 = ₹750

• First call due: 50 × ₹25 = ₹1,250

  
  

If the investor does not pay the ₹1,250 first call amount and the required forfeiture process is followed, ABC Ltd. may forfeit those shares.

Once shares are forfeited, the company may reissue or otherwise dispose of them according to the terms permitted under its Articles and applicable requirements.
The company’s board determines the terms of reissue. The reissue price is therefore not simply an unrestricted price chosen by the company.
Reissuing forfeited shares allows the shares to be transferred to a new holder.
 

Share forfeiture can affect both the shareholder and the company.

Loss of ownership

The shareholder loses ownership of the forfeited shares. This includes voting rights, dividend rights, and the ability to benefit from any future increase in their value.

Loss of potential gains

Once the shares are forfeited, the former shareholder cannot benefit if their value later increases.

Impact on financial ratios

Forfeiture and subsequent treatment of the shares may affect company figures used in financial analysis. The actual effect depends on how the forfeited shares are subsequently dealt with.

Impact on the company’s share structure

Forfeited shares return to the control of the company and may later be reissued or otherwise disposed of according to applicable requirements.

Legal and tax implications

Companies must follow the applicable rules and their Articles while forfeiting and reissuing shares. The tax implications for shareholders can depend on the applicable tax rules and individual circumstances.
 

Forfeiture primarily allows a company to deal with shares where the shareholder has failed to meet the required conditions. Some of the effects mentioned below may arise depending on what the company does with the forfeited shares, but they are not automatic.

Possible effect on earnings per share

Changes in the number and treatment of shares may affect earnings per share (EPS). The actual effect depends on the company’s share structure and subsequent reissue of the forfeited shares.

Possible effect on return on equity

The treatment of forfeited shares may also affect financial measures such as return on equity (ROE). The impact depends on the company’s financial position and accounting treatment.

Possible effect on dividends

Forfeiture does not automatically result in higher dividends. Dividend payments depend on factors such as the company’s profits and dividend decisions.

Effect on ownership and voting rights

The shareholder whose shares are forfeited loses voting rights attached to those shares. The eventual effect on other shareholders depends on whether and how those shares are reissued.

Enforcement of payment conditions

Forfeiture allows a company to enforce the payment conditions attached to its shares when a shareholder fails to pay an amount that is due.

Reissue of shares

A company can reissue forfeited shares according to applicable requirements. The new holder is then registered as the holder of those shares.

Employee scheme conditions

In employee share schemes, forfeiture or lapse provisions can ensure that employees receive benefits only after meeting the applicable vesting or other scheme conditions.
 

Forfeited shares are shares that a shareholder loses after failing to meet required payment or other applicable conditions. The shareholder may lose ownership rights and amounts already paid, while certain unpaid amounts may still remain payable.
The company may subsequently reissue or otherwise dispose of the forfeited shares according to its Articles and applicable requirements. Understanding these conditions can help you know what happens when payment obligations attached to shares are not met.