What are Forfeited Shares

What are Forfeited Shares?

Forfeited shares, a term frequently encountered in online share trading, hold a mysterious allure. Imagine a scenario where shares are lost or relinquished, often sparking curiosity about the circumstances behind their forfeiture. 

This article will delve into the fascinating world of forfeited shares and unravel their enigmatic nature. We will explore the definition of forfeited shares and shed light on the mechanisms that lead to their forfeiture. Brace yourself for an enlightening journey that will demystify this intriguing aspect of online share trading.

What is the definition of forfeited shares?

Forfeited shares are canceled by a company when the purchaser fails to meet the requirements, such as non-payment of call money due. This action typically applies to publicly listed companies with specific provisions for share forfeiture in their Articles of Association.

Once shares are forfeited, the shareholder loses ownership rights, and the shares are returned to the issuing company, resulting in the forfeiture of any potential capital gain.

Causes of Share Forfeiture

The primary cause of share forfeiture occurs when a shareholder fails to meet the payment obligations for call money owed to the company. Here's an example to illustrate this:

Assume an investor purchases 1000 shares and is obliged to pay 25% of the face value up front, with the remaining due in three installments. The investor makes the first payment but fails to make the second. In such instances, the firm can forfeit all of the investor's shares, resulting in ownership of the 1000 shares being lost.

Aside from non-payment of call money, other violations can lead to sharing forfeiture, such as:

1. Shares are issued conditionally based on the shareholder's continued employment with the company for a specified period.
2. Fully paid shares are subject to restrictions on sale or transfer for a certain duration.

Consequences of Forfeiture

Loss of Ownership Rights and Privileges: When a shareholder's shares are forfeited, they forfeit all ownership rights and benefits associated with those shares. This includes the right to receive dividends, vote on corporate decisions, and any possible capital gains from the shares. For the shareholder, the forfeited shares have no value.

Return of Forfeited Shares to the Company:

When shares are forfeited, they are returned to the issuing firm. The corporation can cancel the shares or reissue them to new owners. The corporation regains ownership of the lost shares.

Potential Loss of Invested Capital 

Forfeiture of shares can lead to a potential loss of the capital invested by the shareholder. If the shareholder fails to comply with the requirements for purchasing the shares and forfeits them, any invested funds are effectively lost. This underscores the importance of adhering to the obligations and responsibilities associated with share ownership.

Advantages of Forfeited Shares

Financial Boost for the Company: When shares are forfeited, the funds received from shareholders who failed to meet their obligations are returned to the company. These proceeds provide a financial boost, which can be utilized for various purposes, such as funding future development projects or addressing liabilities.

Capital Injection for Growth: Infusing funds from forfeited shares can contribute to the company's growth and expansion plans. The additional capital enables the company to pursue new opportunities, invest in research and development, or explore strategic partnerships, fostering progress and innovation.

Enhanced Reserves and Surplus: If the company decides to reissue the forfeited shares at a premium price higher than their face value, the premium amount directly adds to its reserves and surplus. This strengthens the company's financial position and enhances its overall valuation, showcasing increased shareholder equity.

Improved Financial Flexibility: The availability of additional capital via surrendered shares allows the corporation to be more financially flexible. It enables strategic decisions such as pursuing acquisitions, repaying debts, or allocating resources to areas with high prospective returns while guaranteeing prudent financial management.

Optimized Resource Allocation: The corporation can optimize resource allocation by using the money from surrendered shares. It can direct cash to areas that demand investment, such as research, technological improvements, marketing activities, or talent acquisition, enhancing operational efficiency and competitiveness.

Conclusion

Overall, forfeited shares are shares that a company cancels when the purchaser fails to meet the necessary requirements. This includes non-payment of call money due. Understanding the reasons, consequences, and processes involved in share forfeiture is crucial for shareholders, and you can stay informed about such matters using a share trading app. In addition, it emphasizes the importance of adhering to company rules and fulfilling obligations to avoid forfeiture. 

For insights and information on forfeited shares and related topics, visit blinkX, your go-to resource for financial knowledge and investment guidance. Explore blinkX for a deeper understanding of the stock market and shareholder responsibilities.