A forfeited share is a share in a publicly-traded company that the owner loses (or forfeits) by neglecting to live up to any number of purchase requirements. For example, a forfeiture may occur if a shareholder fails to pay an owed allotment (call money), or if he sells or transfers his shares during a restricted period.
When a share is forfeited, the shareholder no longer owes any remaining balance and surrenders any potential capital gain on the shares, which automatically revert back to the ownership of the issuing company.
When shares are allotted to an applicant, he and the company enter into a contract automatically. Then such an applicant is bound to pay the allotment money and all the various call monies till the shares are fully paid up. But if the shareholder fails to pay any of the calls (one or more) on the authorization of the board of Directors, the said shares can be forfeited. Forfeiture essentially means cancellation.
Before such forfeiture is done a notice must be given to the shareholder. The notice must provide the shareholder with a minimum of 14 days to make the payment due, or his shares will be forfeited. Even after such notice if the shareholder does not pay, then the shares will be canceled.
When the said shares are forfeited the shareholder ceases to be a member of the company. He loses all his rights and interests that a shareholder might enjoy. And once his name is removed from the register of shareholders he also losses all the money he has already paid towards the share capital. Such money will not be refunded.
How Forfeited Shares Work?
Suppose an investor named David agrees to buy 5,000 shares of a company, with a 25% initial payment requirement, followed by three subsequent annual 25% installments, that are due according to a schedule dictated by the company. If David is derelict on a scheduled installment, the company may seize his entire 5,000 shares, and David sadly would lose any money he previously paid.
However, it should be noted that companies are not required to seize shares from delinquent shareholders, as they can offer investors grace periods in which to pay money owed.
Accounting Treatment for Forfeiture
When the shares have forfeited all entries regarding the issue of such shares have to be reversed. So the following adjustments are made for forfeiture of shares
(i) Share Capital – debited with total amounts called up
(ii) Unpaid Call A/c (Allotment, First Call etc) – credited with the portion of the amount called up but unpaid
(iii) Share Forfeiture A/c – credited with the amount already paid by the defaulter
Points to be Noted
- If the company maintains a Calls in Arrears account, then that account will be credited with the unpaid portion of the amount instead of Share Allotment A/c or Share Call A/c.
- The balance in the Share Forfeiture A/c is shown under the Share Capital on the liabilities side of the balance sheet. This account will remain till the said shares forfeited are reissued by the company.