Forfeited shares explained: what happens when shares are forfeited?

Understanding the concept of forfeited shares is essential for anyone involved in the stock market. Forfeit shares’ meaning revolves around the idea that shareholders can lose their ownership rights under certain conditions. 

This article will delve into what are forfeited shares, the reasons behind share forfeiture, and the process of the reissue of forfeited shares. If you're looking to invest in share market online, it's important to be aware of these scenarios to make informed decisions in your online share trading activities.

Forfeit shares meaning: A fundamental concept

Forfeit shares meaning refer to the procedure by which a company cancels a shareholder's shares because of their failure to pay required calls or other violations of the share issuance terms. When shares are forfeited, the shareholder loses all rights and claims over those shares, including any dividends or voting rights. This action is typically taken after a shareholder fails to pay the required amount, even after being given notice by the company.

What are forfeited shares?

Simply put, forfeited shares are those that have been taken back by the issuing company from a shareholder due to the failure to meet financial obligations. This can occur when a shareholder does not pay the call money, which is the amount requested by the company after the initial payment made during the share purchase. Once forfeited, these shares become the property of the company, and the original shareholder has no further claim on them.

Reasons for share forfeiture

Several reasons can lead to the forfeiture of shares, and understanding these can help you navigate your investments better, especially when you invest in share market online. Here are some common reasons:

1. Non-payment of call money: The most common reason for share forfeiture is the non-payment of call money. When a company issues shares, it may request the payment in instalments. If a shareholder fails to pay any instalment, the company may forfeit the shares.
2. Violation of terms: A shareholder may also lose their shares if they violate the terms and conditions set by the company at the time of share issuance. This could include anything from breaching the company’s code of conduct to failing to comply with regulatory requirements.
3. Failure to maintain minimum holdings: In some cases, companies may require shareholders to maintain a minimum number of shares. Not adhering to this could lead to forfeiture.

The process of share forfeiture

Understanding the process of share forfeiture is crucial for both companies and investors engaged in online share trading. Consider the following steps:

1. Issuance of notice: The company sends a notice to the shareholders, informing them of the due payment and the consequences of non-payment.
2. Grace period: Shareholders are typically given a grace period within which they must pay the outstanding amount.
3. Forfeiture of shares: If the shareholder fails to make the payment within the specified period, the company proceeds to forfeit the shares. At this point, the shares are taken back by the company, and the shareholder loses all associated rights.
4. Reissue of forfeited shares: After forfeiture, the company may decide to reissue the shares to new investors. The reissue of forfeited shares usually occurs at a price lower than the original issue price to attract buyers.

Key steps in the process of share forfeiture

Reissue of forfeited shares: what you need to know

The reissue of forfeited shares is a critical aspect for companies and potential investors. Once the shares are forfeited, the company may decide to reissue them to new shareholders. This process can help the company recover the unpaid amount and reintegrate the shares into the market.

1. Pricing: The reissue of forfeited shares often occurs at a price lower than the original issue price. This discounted pricing aims to attract new investors who may be hesitant to purchase previously forfeited shares.
2. Rights of new shareholders: Investors who acquire reissued shares have the same rights as those who bought shares during the initial issuance. This includes voting rights, dividends, and the ability to participate in future rights issues.
3. Impact on market perception: The reissuing of forfeited shares can affect the company's market perception. Investors may view the forfeiture and subsequent reissue as a sign of financial distress within the company, potentially impacting the share price.

Implications of forfeited shares for online share trading

For investors involved in online share trading, understanding the implications of forfeited shares is essential. Here’s why:

1. Investment risks: Forfeited shares indicate that the original shareholders failed to meet their financial obligations. This could signal potential risks associated with the company, which might deter some investors from buying reissued shares.
2. Opportunity to acquire shares at a discount: On the flip side, the reissue of forfeited shares presents an opportunity to acquire shares at a discounted price. If the company has strong fundamentals, buying these shares could lead to significant gains when the market corrects its perception.
3. Due diligence: Before purchasing reissue forfeited shares, it’s crucial to conduct thorough research on the company’s financial health and the reasons behind the forfeiture. This ensures that you are making an informed decision when you invest in share market online.

Key takeaway

Understanding forfeited shares meaning and the process surrounding what are forfeited shares is vital for anyone engaged in the stock market, especially those involved in online share trading. While forfeiture can signal underlying risks, the reissue of forfeited shares can also present unique opportunities for savvy investors. 

By staying informed and conducting thorough research, you can make strategic decisions when you invest in the share market online, potentially turning forfeited shares into valuable assets in your portfolio.