Forfeiture of shares refers to the cancelation of shares. Sometimes, shareholders may be unable to pay the money due on allotment or calls on the due date. In this case, the company may forfeit such shares. On forfeiture, the company extinguishes the title of such shareholder. It also forfeits the money received on forfeited shares till the date of forfeiture. Consequently, the Company may opt for Reissue of Shares.
Re-issue of Forfeited Shares
Forfeited shares are available with the company for sale. After the forfeiture of shares, the company is under an obligation to dispose off the forfeited shares.
The company requires to pass a resolution in its Board Meeting for the re-issue of forfeited shares. Re-issue of forfeited shares is a mere sale of shares for the company. A company does not make allotment of these shares.
The company auctions the forfeited shares and disposes them off. A company can re-issue these shares at any price but the total amount received on these shares should not be less than the amount in arrears on these shares. Here, total amount refers to the amount received from the original allottee and the second purchaser.
For example, A pays the application amount of ₹3 on 100 shares of the face value ₹10. But, he fails to pay the allotment money. The company forfeits his shares and re-issues them. Now, the amount in arrear is ₹7 per share. The company can re-issue the shares at ₹7 or more. Thus, it cannot issue shares at a price less than ₹7.
Introduction to Forfeiture and Reissue of Shares
If a shareholder fails to pay allotment money or a call or a part thereof by the last date fixed for payment, the Board of Directors, if Articles of Association of the company empower it to do so, proceed to forfeit the shares on which allotment money or call has become in arrear.
The Articles of Association lay down the procedure. A notice has to be served on the defaulter requiring him to pay the unpaid amount together with interest accrued by a certain date.
The notice also must state that in the event of non-payment on or before the date so named, the shares in respect of which the notice has been served will be liable to be forfeited. When shares are forfeited, the shareholder’s name is removed from the register of members and the amount already paid by him on shares is forfeited to the company.
It is a capital gain and is credited to Forfeited Shares Account. A forfeited share may be reissued even at a loss. But the loss on reissue cannot exceed the gain on forfeiture of the share reissued.
- We show the Forfeited shares A/c under the heading ‘Share Capital’.
- When a company re-issues only a part of the forfeited shares, then it will transfer only the profit relating to this part to the capital reserve.
- When a company re-issues shares at a price more than their face value, it needs to transfer the excess amount to the Securities Premium A/c.