When a company issues its shares to the public, you can buy them by paying the issue price in instalments. In case you fail to pay one or more instalments due, then the Board of Directors of the company can cancel the shares allotted to you. This is called forfeiture of shares.
If you, as a shareholder, fail to comply with the company's terms, your shares are withdrawn by the issuing company. It is a legal provision per the Articles of the Association of Listed Companies.
Reasons for Forfeiture of Shares
Shares can be forfeited from you owing for different reasons. These are mentioned below:
- • If you fail to make payments for any of the calls due, your shares may be forfeited.
- • Suppose you are an employee of a company which has allotted you fully-paid shares on the condition that you do not resign before a certain period. If you don't comply with this condition, it will lead to the forfeiture of your shares.
- • Fully-paid shares have restrictions on sale or transfer before a certain period. Non-compliance will result in the forfeiture of shares.
Effects of Forfeiture of Shares
Forfeiture of shares is carried out on defaulters by the Board of Directors of a listed company. If you fail to make payments on time, you will have to bear the following consequences.
• Cancellation of Membership
If your shares are forfeited, you lose their ownership. Your membership is withdrawn, and all the allotted shares return to the company.
• No Refunds
With forfeited shares, any amount you initially paid towards application, allotment or call money will not be credited back. Any potential capital gain will also stand forfeited.
• No Further Liability
After the forfeiture of shares, you do not have the liability to pay for future call money. But you are still liable to pay any unpaid call money as a debtor.
• Tag of Past Member
As a former shareholder, you may be added to the 'List B' of contributors of the company if the company liquidates within a year after forfeiting your shares.
The effect of this event on the company is also given:
• Benefit to the Company
Since the company does not have to refund the partial payments by the defaulters, it gets a surplus of money. The company can use this surplus for other business purposes. It can profit if the forfeited shares are re-issued at a premium price.
An Example of Forfeiture of Shares
Suppose a company, ABC Ltd., issues 1,00,000 shares of ₹10 each. The shares are payable as ₹2 on the application, ₹2 on the allotment, ₹3 on the first call, and ₹3 on the final call.
You have been allotted 100 shares of this company. So, you need to pay ₹200 on the application, ₹200 on the allotment, ₹300 on the first call, and ₹300 on the final call. However, you paid only ₹700 and failed to make the last payment. As a result, ABC Ltd. has decided to forfeit all the shares allotted to you.
In this case, you will lose all your 100 shares as well as the ₹700 paid by you. Hence, you will lose your membership and the amount already paid.
This example shows that the forfeiture of shares gives an advantage to companies. They can invest the money gained from forfeiture to fund their business expansion plans.
How Does the Forfeiture of Shares Work?
Forfeiture of shares is carried out when a company decides to withdraw or cancel shares in case of non-compliance by shareholders. There is a defined procedure to initiate this:
- The list of defaulters is prepared by the Secretary. It is then sent to the Board of Directors for approval. They pass a resolution to send call notices to all the defaulters.
- The notice states that the defaulters have 14 days to pay the due calls and interest at a specified rate.
- If the defaulter does not make the payment within 14 days, a second notice may be sent stating that if payment is not made within the next 14 days, their allotted shares will be forfeited.
- If the payments are not made even after the second notice, the Board of Directors will again pass a formal resolution to forfeit the shares of defaulters.
- If the shareholder is ready to make the payment after the forfeiture of shares, the Board of Directors may pass a resolution to decide on the terms of annulment.
Factors to Consider before Investing in Shares
Here are certain factors regarding shares and their forfeiture that you should consider before investing in them.
- On non-payment of the call money, the issuing company will forfeit the shares allotted to you.
- After the forfeiture of shares, any amount paid by you previously will also be forfeited.
- The forfeited shares go back to the company and can be re-issued to others. The re-issue price of such shares may be given at a discount or a premium to the issue price.
- When a company gives fully-paid shares to an employee, it can forfeit them if the employee resigns before the mandatory serving period mentioned in the contract.
- Post the forfeiture of shares, the defaulter loses their membership and is not liable to make future payments due. However, they will still be liable to pay any unpaid call money to the company.
As an investor, you need to be aware of the forfeiture of shares. To avoid losing your shares, you should pay the call money on the company's demand.
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Can I make the payments after the forfeiture of shares?
When can the shares be forfeited?
- • If payment is not made on the call money
• If an employee holding the company’s shares resigns before the compulsory serving period
• If the shareholder sells or transfers the shares before the stipulated period