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Forfeited shares are shares issued by a company that are cancelled because the shareholder failed to pay the allotment or call money within the specified period.
This article will explain the process of share forfeiture, notice requirements, its impact on shareholders, and the reissue and accounting of forfeited shares.
Key Takeaways
- Forfeiture applies to partly paid shares when valid calls remain unpaid. Under ESOPs, forfeiture may occur if the employee does not meet the scheme's specified conditions.
- The process is not automatic. It requires explicit authorisation in the company’s Articles of Association and a formal notice period of at least 14 days.
- The defaulting shareholder loses all ownership, voting, and dividend rights, and may remain liable for past unpaid dues until full recovery.
- Companies can cancel the forfeiture before reissuing the shares if the default is cleared with interest and expenses.
- Listed companies must comply with rigorous SEBI disclosure norms and depository (NSDL/CDSL) guidelines during forfeiture and reissue.
What are Forfeited Shares?
Forfeited shares are shares reclaimed by a company because the holder failed to pay a valid call, instalment, interest, or other mandatory payment.
A company cannot use forfeiture to settle personal disputes, alter its capital structure, or arbitrarily remove a shareholder. The power must derive strictly from its Articles of Association (which are often aligned with Table F of Schedule I to the Companies Act, 2013).
Where Forfeiture Actually Applies?
Forfeiture is a mechanism reserved for specific scenarios where a shareholder has a continuing payment obligation. It is relevant in:
- Partly paid-up issues: If a company issues shares where only a portion of the face value is paid upfront, with the remainder due upon future "calls". If the shareholder defaults on these subsequent calls, the company may initiate forfeiture.
- Rights issues: Occasionally, companies may offer rights issues on a partly paid basis, where failure to pay the subsequent call money can lead to forfeiture.
- Employee stock options (ESOPs): Companies may include provisions allowing forfeiture of unvested or partially paid shares if an employee leaves the company or fails to meet specific vesting criteria.
Why Forfeiture is Irrelevant for IPO Investors
Share forfeiture is non-existent for standard IPO investors for the following reasons:
- The ASBA Mechanism: Since the mandatory implementation of ASBA (Applications Supported by Blocked Amount), investors do not pay "instalments" or "calls" after allotment. The full application amount is blocked in the investor's bank account at the time of bidding and is only debited upon successful allotment.
- Fully Paid Shares: IPOs are almost exclusively for fully paid-up shares. Because the entire issue price is collected upfront, there is no "unpaid" balance, meaning there is no legal basis for a company to issue a "call" or subsequently forfeit the shares for non-payment.
Understanding Share Forfeiture with an Example
To understand how share forfeiture works in practice, consider the following lifecycle of an investment in a hypothetical company, ABC Limited.
Issue Structure
ABC Limited issues 1,00,000 shares with a face value of ₹10 each, payable across four distinct installments:
- Application: ₹2 per share
- Allotment: ₹2 per share
- First Call: ₹3 per share
- Final Call: ₹3 per share
The Default Scenario: An investor is allotted 100 shares, bringing their total commitment to ₹1,000. They successfully pay the application, allotment, and first call money, but fail to pay the final call of ₹3 per share for their 100 shares.
The Forfeiture Outcome: Following the mandatory notice period, the Board of Directors passes a resolution to forfeit the shares. The investor loses all 100 shares, their active membership, and the ₹700 they had already paid, as all prior installments are strictly non-refundable.
| Installment Stage | Amount Per Share | Total Due (100 Shares) | Payment Status |
| Application | ₹2 | ₹200 | Paid |
| Allotment | ₹2 | ₹200 | Paid |
| First Call | ₹3 | ₹300 | Paid |
| Final Call | ₹3 | ₹300 | Defaulted / Unpaid |
| Total Summary | ₹10 | ₹1,000 | ₹700 Paid, ₹300 Forfeited |
Understanding "List B of Contributors"
When a company undergoes liquidation (winding up), its debts are paid using available assets and contributions from shareholders and former members. Under corporate insolvency rules, contributors are categorized into two distinct groups:
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List A: Comprises current shareholders who own shares in the company at the time of winding up. They are primarily liable to pay any uncalled or unpaid amounts on their current shares.
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List B: Comprises past members that are individuals who ceased to be shareholders within one year prior to the commencement of the winding-up process. This is where a person whose shares were forfeited lands.
| Aspect | List A (Current Members) | List B (Past Members / Forfeited Holders) |
| Who is included? | Present registered shareholders of the company. | Individuals who transferred or forfeited their shares within 1 year before liquidation. |
| Primary Liability | Liable for any uncalled capital or unpaid call money on current holdings. | Liable for debts contracted before they ceased to be members, but only if List A members cannot fully satisfy the company’s debts. |
| Financial Exposure | Capped at the nominal value of their current shares minus what has already been paid. | Capped at the amount they would have been liable to pay if they had remained a shareholder, factoring in the unpaid value of the forfeited shares. |
Forfeited Shares vs Cancelled Shares
| Basis | Forfeited Shares | Cancelled Shares |
| Financial Impact | Previously paid amounts (application and allotment money) are permanently retained by the company as a surplus. | No prior capital collection is retained in this manner since the shares were never successfully fully subscribed or issued. |
| Liability Status | The default-triggering holder is relieved of future call liabilities but remains vulnerable as a debtor or past member under List B. | No residual liabilities or past-member legal tags apply to any specific investor since no individual contract was breached. |
| Re-issuance Rules | Can be re-issued to new investors at a discount (capped at the amount already paid/forfeited on those shares) or at a premium. | Requires entirely fresh authorization, regulatory filings, and a completely new public issue or private placement process. |
| Origin of Action | Initiated strictly due to a breach of contract and failure of a specific shareholder to honor an installment call. | Stem from broader corporate restructuring, capital reduction plans, or the expiry of unissued authorised share quotas. |
The Legal Framework and Forfeiture Process
To execute a valid forfeiture, a company must follow a structured, compliance-driven procedure:
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Verify default: Confirm that a legitimate call or instalment is unpaid and that the Articles explicitly authorise forfeiture for that default.
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Serve formal notice: Issue a written notice to the defaulting shareholder stating the exact unpaid amount, applicable interest, payment location, and a strict deadline. Under Table F guidelines, this deadline must be at least 14 days from service.
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Pass a Board Resolution: If the notice period expires without payment, the Board must pass a formal resolution forfeiting the shares and minute the decision.
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Update records: Modify the Register of Members and archive all proofs of service, notices, and board resolutions to ensure corporate compliance.
Forfeiture Consequences and Shareholder Rights
Once shares are forfeited:
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Loss of membership: The individual ceases to be a member with respect to those shares and immediately forfeits voting rights, dividend entitlements, and transfer rights.
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Continuing liability: Under the Table F provisions, the former holder often remains legally liable for all sums due as of the date of forfeiture until the company recovers the full amount through reissue or settlement.
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Reversal option: The Board retains the discretionary power to cancel the forfeiture before the shares are sold or reissued, subject to the payment of all dues, interest, and administrative expenses.
Reissue and Accounting Treatment of Forfeited Shares
A company may reallocate forfeited shares by selling or reissuing them under terms approved by its Board.
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Accounting entry: Money already collected from the defaulting shareholder is credited to a Share Forfeiture Account. Upon reissue, any discount allowed cannot exceed the amount previously paid up on those shares (complying with restrictions under the Companies Act, 2013).
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Capital reserve: Any balance remaining in the Share Forfeiture Account after reissue is transferred to the Capital Reserve, representing a capital profit.
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SEBI compliance: For listed entities, every stage of forfeiture and reissue requires prompt disclosure to stock exchanges under the SEBI LODR regulations.
Conclusion
Share forfeiture is a legal recourse for companies to reclaim partly paid shares when a holder defaults on a mandatory call. Forfeiture is strictly regulated: it requires authorisation in the company’s Articles, formal 14-day notice, and Board approval. It cannot be used to remove shareholders or target fully paid shares. Investors should carefully review the payment terms of partly paid issues. At the same time, companies must ensure full compliance with the Companies Act, 2013, and SEBI listing regulations before initiating any forfeiture or reissue process.
