What is Forfeiture of Shares Meaning Process and Impact
The world of company law and investments has many technical terms that often confuse beginners. One of the most asked questions is what is forfeiture of shares and how it affects both companies and shareholders. Before diving into the details, let us also look at the interesting fact that India shares border with how many countries is a common quiz question that links geography to finance, as borders and economies often overlap.
Understanding forfeiture is important because it highlights how companies protect themselves when shareholders fail to meet payment obligations. In this blog, we will explain the meaning, process, effects, and examples of forfeiture of shares in a simple yet detailed way.
What is Forfeiture of Shares?
To start with, what is forfeiture of shares means the cancellation of shares by a company when a shareholder fails to pay due money on them. A shareholder may be asked to pay instalments during allotment or when a call for unpaid money is made. If the shareholder does not pay even after notices, the company has the legal right to cancel or forfeit the shares.
This action not only cancels the shareholder’s rights but also allows the company to retain the money already paid. The forfeited shares can then be reissued to new investors, helping the company recover losses.
Why Does Forfeiture Happen?
The main reason forfeiture happens is non-payment. When a company issues shares, payments may be collected in parts such as application money, allotment money, and call money. If a shareholder fails to pay the call money within the specified time, forfeiture takes place.
Another case is when employees receive company shares under a scheme but do not meet employment or performance conditions. These shares may also be forfeited. Thus, the meaning of what is forfeiture of shares is not just about money but also about legal and contractual obligations.
Legal Basis of Forfeiture
Forfeiture can only occur if the company’s Articles of Association clearly mention the rules. A company cannot arbitrarily take away shares. It must send proper notices and allow time for the shareholder to make the payment. Only after this procedure can forfeiture be legally valid.
The process protects both the company and the shareholder, ensuring transparency. If the Articles of Association do not mention forfeiture, the company cannot enforce it. This is why governance documents are crucial in corporate law.
Process of Forfeiture
The process of what is forfeiture of shares usually follows these steps:
| Step | Action Taken | Description |
|---|---|---|
| 1 | Issue of Call Money | Company asks shareholders to pay pending amount |
| 2 | Default in Payment | Shareholder does not pay within given time |
| 3 | Notice of Payment | Company issues a notice with final deadline |
| 4 | Resolution of Forfeiture | Board passes a resolution if payment is still not made |
| 5 | Shares Forfeited | Shareholder loses all rights and shares revert to company |
This procedure ensures fairness. The shareholder has a chance to pay, but if they fail, the company has the right to protect itself.
Accounting Treatment of Forfeiture
When shares are forfeited, accounting entries are made to adjust the company’s books. Money already paid by the shareholder is moved into a forfeited shares account. The unpaid portion is canceled from the share capital.
If the forfeited shares are later reissued, any difference between the original value and reissue price is adjusted. This ensures that the company’s balance sheet reflects the true financial status.
Impact on the Shareholder
For the shareholder, forfeiture is a financial loss. They lose the money already paid and all rights attached to the shares. These include the right to dividends, voting, and ownership benefits. It is a strict penalty for failing to meet payment obligations.
This is why it is important for shareholders to pay their dues on time and understand the risks. Knowing what is forfeiture of shares makes investors more careful about their financial responsibilities.
Reissue of Forfeited Shares
Once shares are forfeited, the company can reissue them to new investors. These shares may be issued at par, at a premium, or even at a discount. However, the discount cannot exceed the amount already received on the forfeited shares.
For example, if a share of ₹10 was forfeited after receiving ₹6, the company can reissue it at a minimum of ₹4. This ensures that the company does not suffer a loss.
Example of Forfeiture
Suppose a company issues 1,000 shares of ₹10 each. The shareholder pays ₹5 at allotment but fails to pay the remaining ₹5 during a call. After proper notice, the company forfeits the shares. The shareholder loses the ₹5,000 already paid, and the company may reissue the shares to another investor.
This example makes what is forfeiture of shares clearer as it shows the financial and legal impact of such an event.
Forfeiture in Employee Stock Schemes
In many companies, employees are given stock options as part of their compensation. These shares usually have a lock-in period or performance condition. If the employee leaves the company early or fails to meet the condition, their shares are forfeited.
This protects the company’s interest and ensures only eligible employees benefit from the scheme. Here the meaning of forfeiture is slightly different but still follows the same principle of loss of rights due to non-compliance.
Difference Between Forfeiture and Surrender
Sometimes people confuse forfeiture with surrender of shares. Forfeiture is when the company cancels the shares due to default. Surrender, on the other hand, is when a shareholder voluntarily gives up shares.
Both lead to loss of ownership, but the reason and process differ. Understanding this difference makes the concept of what is forfeiture of shares even more clear.
Effect on Company Capital
When shares are forfeited, the company’s called-up capital reduces. However, the amount already paid on forfeited shares adds to reserves once the shares are reissued.
This strengthens the company’s finances because it avoids losses from unpaid capital. In fact, many companies prefer reissuing forfeited shares quickly to maintain healthy capital structures.
Investor Awareness
Investors must be careful when investing in shares with pending payment obligations. Not paying instalments on time can lead to loss of both money and ownership. Companies issue notices, but defaulting shareholders often ignore them, leading to forfeiture.
By understanding what is forfeiture of shares, investors become aware of the legal and financial responsibilities tied to owning shares. This awareness reduces risks in stock market investments.
Modern Relevance of Forfeiture
In modern times, forfeiture still plays a major role. With global trade and capital markets expanding, companies need strong mechanisms to ensure payment security. Interestingly, while discussing shares, many investors also explore news like easy trip planners bonus shares, which shows how stock markets constantly generate interest.
Thus, forfeiture remains relevant because it ensures companies are protected from default while also teaching shareholders discipline.
Conclusion
Now we can clearly answer the question what is forfeiture of shares. It is the cancellation of shares by a company when shareholders fail to meet payment or performance obligations. The process is legal, systematic, and ensures fairness for both the company and the market.
It affects shareholders by taking away their rights and money, while the company benefits by protecting its capital. Reissue of forfeited shares ensures no loss of funds. For investors, this concept is a reminder to always meet obligations and stay informed.
By understanding the meaning, process, and impact, anyone can confidently explain what is forfeiture of shares. It is more than just a law—it is a protection mechanism that balances the interests of companies and shareholders in the world of business.