What is Forfeiture of Shares

When an investor purchases shares in a company, they are expected to pay the entire value either upfront or in instalments as decided during the share issue. However, if the shareholder fails to meet the payment obligations even after reminders, the company has the legal right to cancel or “forfeit” those shares. This process, known as forfeiture of shares, is governed by the company’s Articles of Association and relevant company laws in India.

Share forfeiture refers to the cancellation of shares by a company when a shareholder defaults on payment of allotment or call money. The company takes back the shares and removes the investor’s name from its shareholder register.

This action helps a company maintain its financial discipline and integrity. The forfeited shares can be reissued later, usually at a price the company deems suitable, subject to legal provisions.

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 canceled. The shareholder loses rights like voting and dividends, while the company can reissue the forfeited shares to others.

Share forfeiture is not arbitrary and must comply with specific conditions, including:

• The defaulting shareholder must be notified through a proper call notice.
  

• The notice must mention the amount due, the last date for payment, and consequences of non-payment.
  

• The Articles of Association should contain a forfeiture clause.
  

• The decision should be passed via a board resolution.

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
  

When employees receive company stock—such as through stock options or purchase plans—they typically must meet specific conditions like a vesting schedule. If an employee leaves the company before those shares vest or before meeting the conditions, they forfeit the unvested shares, and ownership reverts to the company.

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 Share Allotment A/c

   To Share Call 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.

Forfeiture helps maintain a company's financial discipline but must be carried out in a structured and lawful manner.

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.

Forfeiture entry:

Share Capital A/c        Dr. ₹1,000  

   To Share Call A/c         ₹400  

   To Forfeited Shares A/c   ₹600

Later, 80 shares are reissued at ₹8 each.

Reissue entry:

Bank A/c                  Dr. ₹640  

Forfeited Shares A/c      Dr. ₹160  

   To Share Capital A/c       ₹800

Transfer 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.

While both result in loss of shares, the initiator and treatment vary.

Forfeiture of shares is a significant measure that companies use to maintain capital discipline. It ensures that shareholders fulfil their obligations and also protects the company’s financial interests. However, it must be undertaken with strict adherence to legal norms and transparency to avoid disputes and ensure fairness.

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.