What is Forfeiture of Shares?

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In a traditional IPO, interested shareholders bid for the stocks of a company by paying the full price upfront. If you’ve applied for any of the recent IPOs in the Indian stock market, you too may have paid the total cost of the number of shares you bid for. If the shares are successfully allotted to you, they will be credited to your demat account. In case of no allotment, the money you paid will be refunded to your trading account. 

This is how most public issues work. However, in some cases, when a company has compelling commercial reasons, it may issue partially paid-up shares. These are shares for which the shareholders have only paid a part of the price upfront. The rest of the price will be due in installments. And when those installments are not paid, share forfeiture may occur. 

Want to know more about forfeited shares, the effect of such forfeiture and how it works? In this article, you’ll find all these details and more. 

Also Read: Authorized Share Capital: Definition, and Types

What is Forfeiture of Shares?

Let us first define the forfeiture of shares before taking a closer look at how this works. Forfeiture of shares is the process by which shares purchased or issued to you are withdrawn. The reason for forfeiture can be negligence on your part or the failure to comply with any of terms and conditions. 

A company can only forfeit shares if its Articles of Association (AoA) contain clauses permitting share forfeiture. It must, however, issue a notice to the shareholder informing about the forfeiture of shares.

Share Forfeiture: An Example 

Let us take a closer look at an example of share forfeiture. This should give you a better idea of the meaning of the forfeiture of shares. Say a company has issued 1,00,000 shares at Rs. 50 each. The price of Rs. 50 is payable in the following manner:

  • Rs. 10 at the time of application
  • Rs. 10 at the time of allotment
  • Rs. 15 on the first call
  • Rs. 15 on the second call

You apply for 100 of these shares and pay Rs. 1,000 at the time of application. Then, when the shares are allotted to you, you again pay the Rs. 1,000 due on allotment. However, at the time of the first call, you fail to pay the Rs. 1,500 due. On account of this, the company will forfeit your shares and you will lose both the ownership of those shares as well as the amount you’ve already paid for them so far. 

Also Read: What are Bonus Shares?

Reasons for Forfeiture of Shares

There are many reasons why a company may decide to opt for share forfeiture. Let’s take a closer look at the two most common reasons for forfeited shares.

  • Failure to Pay Money Due

As you’ve seen in the example above, when a shareholder fails to pay the money due at the time of application, allotment or any of the calls initiated by the company, the shares held will be forfeited. This reason is pertinent in the context of partially paid-up shares issued by a company. 

  • Violation of Terms of Ownership

Your shares can also be forfeited, even if you have fully paid for them, if you violate any of the terms of ownership. These terms and conditions can range from conduct within the company to financial responsibilities. 

For example, if the company has issued shares to you on the condition of continued association with the company, these shares will be forfeited if you quit the company. Therefore, if the agree upon terms and conditions are violated, the shares can be forfeited despite being fully purchased.

What are the Consequences of Forfeiture of Shares?

Though it is never advisable you should violate the terms and conditions of the issuance of shares, there are certain consequences for forfeiture of shares.  

Here are the common effects of forfeited shares.

  • Cessation of Membership 

You will no longer be a shareholder of the company, which means that you lose your membership in the company. 

  • Removal of Obligations 

Share forfeiture also removes all your future obligations to the company. You will no longer need to pay the money due on future calls. 

  • No Right to the Benefits of Corporate Actions

Since you are no longer a member, you will not be entitled to receive dividends, rights shares or bonus shares. 

Also Read: What are Shares – Meaning & Types of Shares

How Does Share Forfeiture Work? 

When a company notices non-compliance with the terms and conditions associated with an issue, it can initiate the proceedings to have the shares forfeited from the defaulting shareholder(s), provided it is permitted by the company’s Articles of Association. Here is how a company typically goes about this procedure. 

  • A list of defaulters is sent to the company’s Board of Directors for approval. 
  • A resolution is passed to serve call notices to the defaulters on the list. 
  • A grace period (typically 14 days) is given to the defaulting shareholders to pay the money due along with interest.
  • If the money is not paid within the period specified, a second grace period may be granted.
  • In case the defaulters do not pay the call money due even after the second notice, the shares are forfeited. 

Conclusion 

Now that you know the meaning of the forfeiture of shares and why they occur, you can ensure that you do not have your shares withdrawn. To this end, you must pay all the call money due as and when the company announces the dates for the payment, and ensure that you adhere to the other terms and conditions of your shares — whether they are related to your employment or to the transfer/sale of the shares. 

To apply for partly paid-up or fully paid-up shares and to own them, however, you need a demat and trading account. If you want to open these accounts in a hassle-free manner, Bajaj Broking can give you precisely what you are looking for. You can open your accounts via a quick 3-step process and start investing in the markets right away. 

 

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