Forfeiture and Re-Issue of Shares

 

In the realm of corporate finance, the concepts of forfeiture and re-issue of shares are pivotal for students to understand. This lesson will delve into what these processes entail, their significance, and their impact on companies and shareholders. Designed for Class 12 Commerce students, this lesson will provide a comprehensive understanding of these crucial aspects.

1. Understanding Shares

Before diving into forfeiture and re-issue, it's essential to understand what shares represent. Shares are units of ownership interest in a company that contribute to its capital. They are issued to the public or specific investors, enabling the company to raise funds for its operations and expansion.

2. What is Forfeiture of Shares?

Forfeiture of shares occurs when a shareholder fails to pay the allotment money or any subsequent calls made by the company within the stipulated time. As a consequence, the company has the right to forfeit (cancel) these shares. This action is taken under the company's Articles of Association, which outlines the procedure and conditions for forfeiture.

Key Points:

• Initiation: The process begins with a notice to the shareholder, demanding payment within a specified period.
• Forfeiture: If the shareholder fails to comply, the shares are forfeited by passing a board resolution.
• Effect: The defaulting shareholder loses all rights in relation to the forfeited shares, including any amount already paid.

3. Legal and Accounting Implications

The forfeiture of shares has significant legal and accounting implications. Legally, it alters the shareholder’s rights and obligations. From an accounting perspective, the amount paid on forfeited shares is not returned and is instead transferred to a "Forfeited Shares Account." This account may later be used for various purposes, including the re-issue of shares.

4. Re-issue of Forfeited Shares

Re-issue of shares refers to the process where the company sells the forfeited shares to new investors. This can be done at par, at a premium, or at a discount, but not exceeding the original issue discount.

Key Steps:

• Board Resolution: The board must pass a resolution to re-issue the forfeited shares.
• Pricing: The price is determined, considering the company's financial needs and market conditions.
• Rights: The new shareholder enjoys all rights associated with the shares from the date of re-issue.

5. Accounting for Re-issue

The accounting treatment of the re-issue of shares involves several entries, particularly if the shares are issued at a discount or premium. The "Forfeited Shares Account" plays a crucial role here, offsetting any discount on re-issue or contributing to share capital if re-issued at a premium.

6. Importance in Corporate Finance

Forfeiture and re-issue of shares serve critical functions in corporate finance, including:

• Discipline among Shareholders: Ensuring shareholders fulfill their payment obligations.
• Financial Flexibility: Providing a mechanism to manage share capital effectively.
• Investor Opportunities: Offering new investors a chance to participate in the company's growth.

Conclusion

The concepts of forfeiture and re-issue of shares are fundamental in understanding corporate finance dynamics. For Class 12 Commerce students, mastering these topics not only enriches their knowledge of the financial workings of companies but also prepares them for higher studies in commerce and finance.

Activity

Prepare a case study analysis of a company that has recently gone through the process of forfeiture and re-issue of shares. Focus on the reasons behind the forfeiture, the procedure followed by the company, and the financial impact of the re-issue. Present your findings in a structured report format.