What is forfeiture of shares?

An equity share investment that is later canceled by the company that issued it is called a forfeited share. Shares are forfeited when the shareholder, for whatever reason, fails to pay the subscription money that was called upon by the issuing company. 

Forfeiture of Shares Meaning Explained

A company is permitted to forfeit a share when its Articles of Association contain the provision that allows for share forfeiture. A shareholder that buys into the shares of the company owes the company the price of a subscription to its shares. Depending on the company, the shareholder may be asked to pay in installments or as a lump sum for their subscription to the company’s shares. Most often installments are requested on behalf of the company and are referred to as ‘call money.’ This payment is due from the shareholders. The non-payment of one’s dues can result in the company forfeiting their shares that are held by that particular investor. 

As an example, consider that a company called ABC Ltd makes the public offer to price its equities at ₹100 per share. Suppose an investor chooses to subscribe to 1000 of the company’s shares. As part of his first installment, the investor paid 25% upfront, which is at the time of the subscription being bought by him. The remainder of his installments — 75% — is payable across three installments each month. Let’s say that the investor defaults on paying his second installment. Upon being at the receiving end of this default in his payment, company ABC Ltd is entitled, as per their Articles of Association, to forfeit all the shares owned by the investor. This means that the investor who hasn’t paid his installments on time will lose ownership of his shares with company ABC Ltd. 

Process of Forfeiture

Hence, as stated above, if a shareholder fails to pay their call after having been called to pay their installment, the company is entitled to forfeit his shares according to an express provision stated in their articles allowing for forfeiture of shares of any defaulting members. 

1. Notice Sent from Company

Before the shares can be forfeited, the company will be required to inform the shareholder through the help of a notice that reminds them of their payments due. This notice is to be given not less than two weeks’ time after the payment due date. Continuing the prior example provided, company ABC Ltd will send a letter of notice to the investor who has defaulted on his share payments. ABC Ltd can send this notice only after a minimum of two weeks since the investor’s due date for his second installment has passed and they have yet to receive his payment. 

2. Non Compliance of Defaulting Shareholder

Within the notice, company ABC Ltd must clearly state the payment call for which the shareholder has not responded and is liable for forfeiture of his shares. If the shareholder fails to comply with the steps stated in this notice, the company ABC Ltd has full rights to forfeit his shares. 

3. Forfeiture in Effect 

Now, the company can forfeit the shareholder’s shares since he has failed to comply with the notice that was sent after a minimum of two weeks of defaulting on payments. Once the shares of the defaulting shareholder are forfeited, this individual will also cease to be a member of the company in addition to losing all interests and rights in his shares. Notwithstanding the forfeiture, the shareholder continues to remain liable to pay the company all dues which were payable by him to the company on the date of forfeiture itself. 

Factors to Keep in Mind before Becoming a Shareholder:

Hence, now that we understand how forfeited shares work, here are a few factors to consider before investing as a shareholder. 

– You lose ownership of your shares if they are forfeited shares. 

– All forfeited shares continue to stay vested with the company that issued them. 

– Any subscription money that has already been paid towards one’s shares in the form of prior installments is lost when the shares are forfeited. Hence, one cannot earn any capital gains as their position from the company is completely removed upon forfeiture of share. 

– Forfeited shares only become invalid to the defaulting investor. They can be reissued to another shareholder at some point in the future. Forfeited shares are normally issued at a discount from the current issue price. The reason behind this is that the issuing company may have already forfeited some portion of the issuing price that was already paid on these shares. 

– Forfeited shares can include the shares held by an investor in either a listed or an unlisted company.