Forfeited Shares

Share forfeiture is a process through which a company cancels shares held by a shareholder who has not paid the required allotment or call money within the stipulated timeline. When this happens, the shareholder’s name is removed from the register, and the company regains control of those shares.

Key aspects of share forfeiture include:

• It is initiated when payment obligations remain unmet after due notice.

• The rights attached to the shares, such as voting or dividends, cease once forfeiture takes effect.

• The company may reissue the forfeited shares later, following applicable rules and provisions.

• It supports orderly record-keeping and upholds the terms set out in the Articles of Association.

In essence, share forfeiture allows companies to maintain clarity in capital management while retaining the flexibility to reallocate forfeited shares when required.

Forfeited shares are those reclaimed by a company when shareholders fail to pay the due amount on their shares. The company issues a notice, and if payment isn’t made, the shares are cancelled. The shareholder loses rights like voting and dividends, while the company can reissue the forfeited shares to others.

For share forfeiture to take effect, companies must follow a structured set of rules that establish clarity in the process.

To proceed with share forfeiture, the following conditions generally apply:

• Issuance of a proper call notice to the shareholder in default.

• Clear communication of the amount due, the payment deadline, and the implications of non-payment.

• Presence of a forfeiture clause in the Articles of Association, authorising the company to initiate such action.

• Approval through a board resolution, formally recording the decision to forfeit the shares.

These requirements help maintain consistency in how share forfeiture is executed and ensure that the company’s records reflect the change accurately and lawfully.

Forfeiture generally occurs in the following situations:

• Non-payment of allotment money

• Failure to pay subsequent call money

• Breach of terms laid out in the Articles of Association regarding payment

Employee share forfeiture applies when equity granted under a vesting schedule or through plans like stock options or an Employee Stock Purchase Plan has not fully vested. If an employee leaves before meeting the required conditions, the unvested shares revert to the company.

This ensures that ownership aligns with the terms of the grant and reflects only the vested portion earned by the employee.

When shares are forfeited, the company reverses the entries related to unpaid share capital and adjusts the amount already received.

Here’s a simple format of accounting entries:

On forfeiture of shares:

Share Capital A/c.................Dr  

      To Allotment/Call Money Due A/c  

      To Forfeited Shares A/c

This reflects the reversal of capital and records the amount already paid in the Forfeited Shares Account.

Once shares are forfeited, the company has the authority to reissue them, either at par, at a premium, or at a discount. However, the discount must not exceed the amount originally received from the first shareholder.

Example:

If shares of ₹10 each were forfeited after receiving ₹7, they can be reissued at a minimum of ₹3 per share.

The entry for reissue is:

Bank A/c........................Dr  

Forfeited Shares A/c........Dr  

      To Share Capital A/c

And for transferring remaining balance:

Forfeited Shares A/c........Dr  

      To Capital Reserve A/c

This ensures that the reissued capital and reserves are accurately represented in the company’s books.

Let’s say 100 shares of ₹10 each were issued. A shareholder pays ₹6, but fails to pay the final call of ₹4. The shares are forfeited.

Accounting Treatment at Forfeiture

Share Capital A/c................Dr ₹1,000  

     To Call Money Due A/c................₹400  

     To Forfeited Shares A/c...............₹600

Later, the company decides to reissue 80 of these forfeited shares at ₹8 per share.

Entry for Reissue of Shares

Bank A/c................................Dr ₹640  

Forfeited Shares A/c................Dr ₹160  

     To Share Capital A/c................₹800

This reflects that the reissue value plus the amount drawn from the forfeited balance equals the nominal value of the 80 shares.

Transfer of Surplus to Capital Reserve

Forfeited Shares A/c................Dr ₹320  

     To Capital Reserve A/c...............₹320

This example shows how the unpaid amount is recovered and balance is used as capital reserve.

Share forfeiture is a formal process through which companies manage unpaid share capital and maintain clarity in their equity records. When carried out in line with the company’s governing documents and applicable laws, it supports transparent treatment of shareholder rights and the company’s capital structure.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.