What Are Forfeited Shares?

Forfeited shares refer to shares that a company reclaims from a shareholder due to non-payment of the allotment or call money. When a shareholder fails to meet the payment obligations after subscribing to a company’s shares, the company has the right to forfeit those shares. These shares are then either reissued or canceled, depending on the company’s policy.

In the Indian share market, forfeited shares highlight the importance of timely payments and adherence to share subscription agreements.

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Key Characteristics of Forfeited Shares

1. Non-Payment of Dues:
   • Forfeiture occurs when shareholders fail to pay allotment or call money.
2. Company’s Right:
   • The issuing company has the authority to forfeit the shares as per its Articles of Association.
3. Reissuance or Cancellation:
   • Forfeited shares can be reissued at a discounted price or canceled altogether.
4. Loss to Shareholders:
   • Shareholders lose all rights associated with the forfeited shares, including dividends and voting rights.

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Reasons for Share Forfeiture

1. Non-Payment of Allotment Money:
   • Failure to pay the amount due during the allotment stage.
2. Non-Payment of Call Money:
   • Shareholders not paying the subsequent installments called by the company.
3. Violation of Terms:
   • Breach of subscription agreement terms.

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Process of Share Forfeiture

1. Notice to Shareholders:
   • The company issues a notice to defaulting shareholders, specifying the amount due and the deadline.
2. Board Resolution:
   • The board of directors passes a resolution to forfeit the shares after the deadline expires.
3. Recording in Financials:
   • Forfeiture is recorded in the company’s books as a reduction in share capital.
4. Reissuance or Cancellation:
   • The company decides whether to reissue the shares or cancel them permanently.

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Example of Forfeited Shares

Hypothetical Scenario:

• Company: XYZ Ltd.
• Face Value of Share: INR 10
• Allotment Money Due: INR 5
• Call Money Due: INR 2

If a shareholder fails to pay the allotment money of INR 5 per share, XYZ Ltd. can forfeit those shares. The forfeited shares can then be reissued at a discounted rate, say INR 8 per share.

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Accounting Treatment of Forfeited Shares

Scenario	Accounting Entry
Forfeiture of Shares	Debit: Share Capital A/C, Credit: Forfeited Shares A/C
Reissue of Shares	Debit: Bank A/C, Credit: Share Capital A/C and Forfeited Shares A/C

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Historical Data: Forfeited Shares in India

Notable Cases of Share Forfeiture

Year	Company	Reason	Outcome
2015	ABC Textiles	Non-payment of call money	Shares reissued at a discount
2020	DEF Infrastructure	Breach of subscription terms	Shares canceled

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Implications of Share Forfeiture

1. For Companies:
   • Enables capital recovery through reissuance of shares.
   • Helps maintain financial discipline among shareholders.
2. For Shareholders:
   • Results in loss of ownership, dividends, and voting rights.
   • Impacts reputation and creditworthiness.

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Legal Provisions for Share Forfeiture in India

1. Companies Act, 2013:
   • Governs the process and conditions for forfeiture of shares.
2. Articles of Association (AoA):
   • Details the company-specific rules for share forfeiture.
3. SEBI Regulations:
   • Ensure transparency and compliance in the forfeiture process.

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Benefits of Forfeited Shares for Companies

1. Capital Recovery:
   • Allows the company to reissue shares and recover dues.
2. Financial Discipline:
   • Encourages timely payments from shareholders.
3. Flexibility:
   • Companies can reissue forfeited shares at discounted rates to attract new investors.

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Risks and Challenges

1. Market Perception:
   • Frequent forfeiture may indicate financial instability.
2. Legal Complications:
   • Non-compliance with regulations can lead to penalties.
3. Administrative Overhead:
   • Managing forfeiture and reissuance requires meticulous record-keeping.

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Practical Tips for Investors

1. Understand Payment Obligations:
   • Review the terms of share subscription agreements carefully.
2. Monitor Company Notices:
   • Stay updated on payment deadlines to avoid forfeiture.
3. Analyze Company Reputation:
   • Avoid companies with a history of frequent share forfeitures.

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Conclusion

Forfeited shares are an integral aspect of the Indian share market, reflecting the financial discipline required from shareholders and the mechanisms companies use to recover unpaid dues. Understanding the process, implications, and historical trends of share forfeiture equips investors with the knowledge to make informed decisions and avoid potential losses.

This guide provides a comprehensive overview of forfeited shares, helping both companies and investors navigate this complex financial concept effectively.