Forfeiture of Shares

Forfeiture of Shares

A type of ownership share whereby the holder gives up certain rights due to not fulfilling obligations required for purchasing the share. The rights lost may include claims on dividends or capital gains or ability to purchase additional stock. This type is usually offered through employee stock ownership plans.

If there is increased level of failure on the part of the investors either in public issues or rights  issues of  shares,  forfeiture of shares  becomes inevitable due to  the  situation that the companies cannot continue to show calls in arrears in the financial statements either  because of commercial decisions or because of  statutory guidelines issued by capital  market regulators or it can be for both reasons. Forfeiture of shares results in removal of the name of shareholder from the company’s register of members. On forfeiture of shares, the shareholders who could not pay the call money, cease to be members of the company.  Forfeiture of shares  means cancellation of  shares  already allotted for non-payment of call or installment of a call or other moneys due on shares.  The provisions relating to forfeiture shall  apply in case of non-payment of any sum, which by terms of issue of shares, becomes payable at a fixed time, whether on account of nominal value or premium as if it is payable by virtue of a call duly made and notified.  When shareholder fails to pay, the companies may resort to forfeiture and re-issue the shares to other persons and collect the unpaid money. 

The forfeiture of shares does not  amount to reduction of share capital since at any time, the board of directors are having the power to reissue the forfeited subject to the articles of association and none of modes of the reduction of capital as per Section 100 of Companies Act, 1956 is applicable to the forfeiture of shares. 

There  is no statutory provision for  forfeiture of  the shares under Companies Act, 1956.  However, there is a provision in Chapter VIII of  the SEBI(Disclosure and Investor Protection) Guidelines, 2000, which is reproduced herein  below: 

Securities Issued to be Made Fully Paid Up 

a) If the subscription money is proposed to be received in calls, the calls shall be structured in such a manner that the entire subscription money is called within 12 months from the date of allotment.

b) If the investor fails to pay call money within 12 months the subscription money already paid may be forfeited.

c) If the issue size is above Rs.500 crores and is subject to monitoring requirement as per Clause 8.17.1 of this Chapter, it shall not be necessary to call the entire subscription money within 12 months.

Forfeiture of Shares