Forfeiture of Shares: What They Are and How They Work

Forfeiture of shares occurs when a shareholder fails to meet the obligations associated with owning shares in a company. Typically, this involves not paying the full amount due on the shares, either during the initial issuance or in subsequent calls for payment. When shares are forfeited, the shareholder loses all rights and ownership associated with those shares, and the company reclaims them.

The forfeiture of shares is usually detailed in the company's articles of association, outlining the procedures and consequences for non-payment. Forfeiture of Shares can then be reissued or sold by the company to recover the unpaid amounts.

How Forfeiture of Shares Work

The process of forfeiture of shares involves several steps:

• Notice of Non-Payment: The company issues a notice to the shareholder who has failed to pay the required amount, giving them a deadline to make the payment.
• Final Warning: If the payment is still not made, the company issues a final warning, providing a last opportunity to fulfill the payment obligation.
• Resolution of Forfeiture: If the shareholder does not comply, the board of directors passes a resolution to forfeit the shares.
• Cancellation of Shares: The shares are formally canceled, and the shareholder's name is removed from the register of members.
• Reissue or Sale of Forfeiture of Shares: The company can then reissue or sell the Forfeiture of Shares to new investors, often at a discount to recover the unpaid amounts.

Example of Forfeiture of Shares

To understand what is forfeiture of shares, consider this example:

Example: ABC Ltd. issues shares with a face value of ₹100 each. The company calls for ₹50 initially, and the remaining ₹50 in two installments of ₹25 each. Mr. X, a shareholder, pays the initial ₹50 but fails to pay the first installment of ₹25. After receiving the notice and final warning, Mr. X still does not make the payment. Consequently, ABC Ltd. forfeits Mr. X's shares.

ABC Ltd. then reissues these Forfeiture of Shares at ₹40 each to recover the unpaid amount. Mr. X loses ownership and any rights associated with those shares.

Conclusion

Forfeiture of shares is a critical mechanism for companies to enforce payment obligations and maintain financial stability. Understanding the process and implications of Forfeiture of Shares can help investors and companies navigate financial management more effectively.