Understanding the concepts of issue and forfeiture of shares is essential for students, investors, and professionals in corporate law and finance. These topics often appear in examinations and practical scenarios, where companies issue shares to raise capital and may, in certain circumstances, forfeit shares when shareholders fail to comply with payment obligations. Knowing the rules, procedures, and implications of both the issue and forfeiture of shares can help individuals answer questions effectively and make informed decisions in business contexts. This topic provides a comprehensive explanation of common questions and answers related to issue and forfeiture of shares.
Issue of Shares
The issue of shares refers to the process by which a company offers its shares to potential investors to raise capital. It is a primary source of funding for companies and is governed by company laws, regulations, and the company’s topics of association.
Common Questions and Answers on Issue of Shares
Q1 What are the types of shares a company can issue?
A company can issue various types of shares, including
- Equity Shares – Represent ownership in the company and entitle shareholders to dividends and voting rights.
- Preference Shares – Provide preferential rights to dividends and repayment of capital but may have limited voting rights.
- Bonus Shares – Issued to existing shareholders free of cost, usually from accumulated profits.
- Rights Shares – Offered to existing shareholders in proportion to their current holdings at a discounted price.
Q2 What is the difference between private and public issue of shares?
In a private issue, shares are offered to a selected group of people and not to the general public, while a public issue is open to anyone and usually involves listing on a stock exchange. Both methods require compliance with legal and regulatory procedures.
Q3 What is the procedure for issuing shares?
The basic procedure for issuing shares includes
- Passing a board resolution approving the issue.
- Filing necessary documents with the regulatory authorities.
- Fixing the issue price and allotting shares to applicants.
- Updating the company’s register of members.
Q4 What is the difference between authorized, issued, and subscribed capital?
- Authorized Capital Maximum share capital a company is allowed to issue.
- Issued Capital Portion of authorized capital offered to shareholders.
- Subscribed Capital Portion of issued capital that has been accepted by investors.
Forfeiture of Shares
Forfeiture of shares occurs when a shareholder fails to pay the call money or any amount due on the shares. The company has the right to cancel the shareholder’s ownership and take back the shares, often offering them to new investors or selling them through public or private sale.
Common Questions and Answers on Forfeiture of Shares
Q1 Under what circumstances can shares be forfeited?
Shares may be forfeited if the shareholder
- Fails to pay the allotment money.
- Does not pay calls made on the shares within the stipulated time.
- Breaches any conditions specified in the company’s topics related to share payment.
Q2 What is the procedure for forfeiting shares?
The typical procedure involves
- Issuing a notice to the defaulting shareholder specifying the amount due and deadline.
- If the shareholder does not pay within the notice period, passing a board resolution to forfeit the shares.
- Recording the forfeiture in the company’s register of members and informing regulatory authorities if required.
- The company may reissue the forfeited shares to recover the unpaid amount.
Q3 Can forfeited shares be reissued?
Yes, forfeited shares can be reissued to new investors or even to the same shareholder after repaying dues. The reissue price can be at par, premium, or discount, subject to legal restrictions and company regulations.
Q4 What happens to the money already paid by a shareholder whose shares are forfeited?
Typically, any amount already paid by the shareholder before forfeiture can either be retained by the company or partially refunded depending on the terms of the topics of association. Companies often retain this amount as part of the forfeiture policy.
Q5 What is the accounting treatment of forfeited shares?
The accounting entries generally include
- Debiting Share Capital with the nominal value of the shares forfeited.
- Crediting the Forfeited Shares Account with the amount already received.
- If the shares are reissued, adjusting the difference between the forfeited amount and reissue price in the Capital Reserve Account.
Practical Scenarios and Problem-Solving
Many exam questions and real-world scenarios involve calculations and journal entries related to issue and forfeiture of shares. Understanding the principles is key to answering these effectively.
Example Problem 1 Allotment and Call Money
Suppose a company issues 1,000 equity shares of $10 each. The payment is $5 on application, $3 on allotment, and $2 on first call. A shareholder fails to pay the first call.
- The company issues a notice for the unpaid $2 per share.
- If the shareholder does not pay, the shares are forfeited.
- Accounting treatment involves adjusting share capital, forfeited shares account, and preparing for possible reissue.
Example Problem 2 Reissue of Forfeited Shares
Forfeited shares may be reissued at a price higher or lower than the original issue price. The difference is recorded as a capital reserve or loss adjustment. Understanding these entries is crucial for accurate accounting and exam success.
Frequently Asked Questions (FAQ)
Q1 Can only partly paid shares be forfeited?
Yes, shares that are partly paid can be forfeited if the shareholder fails to pay any due amounts on the shares.
Q2 Does forfeiture affect the company’s authorized capital?
No, forfeiture only affects the issued or paid-up capital. The authorized capital remains unchanged unless altered through a resolution.
Q3 What is the difference between forfeiture and surrender of shares?
Forfeiture is initiated by the company due to non-payment, while surrender is voluntarily done by the shareholder. Both result in the return of shares to the company, but the circumstances and procedures differ.
Key Takeaways
- Issue of shares is a way for companies to raise capital through equity participation.
- Shares can be equity, preference, bonus, or rights shares.
- Forfeiture occurs when shareholders fail to pay allotment or calls.
- Forfeited shares can be reissued, and accounting treatment involves proper recording in share capital and capital reserve accounts.
- Understanding rules, procedures, and calculations is critical for exams and practical corporate work.
Mastering the concepts of issue and forfeiture of shares is essential for students, professionals, and investors involved in corporate finance. By understanding the types of shares, procedures for issue, circumstances for forfeiture, and accounting treatments, individuals can answer questions confidently and manage real-life corporate scenarios effectively. Through practice with example problems and familiarity with regulations, handling issues related to shares becomes clear, logical, and manageable.