What Is Forfeiture Of Shares: Meaning, Process & Effects On Shareholders

Forfeiture of shares happens when a shareholder doesn’t pay the company’s due call money. The company cancels those shares, and the shareholder loses both ownership and any money paid.

Let’s understand it with the help of an example:

Let’s say Rohit buys 100 shares of a company at ₹10 each (₹1,000 total). He pays ₹300 on application (₹3 per share) and ₹400 on allotment (₹4 per share), making it ₹700 paid. When the company demands the final ₹300 (₹3 per share), Rohit does not pay, even after reminders.

As a result, the company forfeits its 100 shares. Rohit immediately loses both the ownership of the shares and the ₹700 he already paid. Later, the company can reissue those shares to another person, maybe at ₹8 each.

So, forfeiture means a shareholder loses money and rights if they fail to meet payment obligations. It protects the company and keeps things fair.

What is Forfeiture of Shares?

Forfeiture of shares means cancelling shares if the shareholder doesn’t pay due instalments or calls. The defaulting shareholder loses both ownership and any money already paid for those forfeited shares.

Let’s understand it with the help of an example:

Suppose a company, ABC Ltd., issues 1,000 equity shares at ₹10 each. The company collects this money in stages: ₹3 on application, ₹4 on allotment, and ₹3 on first and final call. This adds up to ₹10 per share.

Now, Mr. Raj applies for 100 shares. Accordingly, he pays ₹300 on application (100 × ₹3) and ₹400 on allotment (100 × ₹4). When the company makes the final call of ₹3 per share, Raj is supposed to pay ₹300. However, he fails to pay this amount. Despite repeated reminders, Raj does not clear his dues.

As a result, ABC Ltd. decides to forfeit Raj’s 100 shares. This means Raj loses his right over those shares and also forfeits the ₹700 he had already paid (₹300 + ₹400). The company cancels these shares and is free to reissue them to other investors.

Therefore, when a shareholder does not pay money due on shares, the company can cancel the allotment, and the shareholder loses both the shares and the money already paid.

What Is The Step-by-Step Process of Share Forfeiture?

Share forfeiture is like a company taking back shares from someone who didn’t pay for them. Here's how it works step by step:

1. Warning Bell: The Notice is Sent

The company first sends a formal notice to the shareholder who hasn’t paid. It mentions:

• The unpaid amount (plus any interest)
   
• A last date to make the payment
   
• A warning: "Pay up or risk losing your shares!"

2. Countdown Begins: Grace Period Starts

The shareholder is given a grace period, usually between 14 to 30 days. It’s their final chance to clear the dues and keep their shares safe.
Think of it like a ticking clock before the final whistle blows!

Read More – What is Paid Up Capital: Meaning, Types & Role in Business Funding

3. Final Decision: Board Passes a Resolution

Still no payment? Then it’s time for the company’s Board of Directors to take action. They pass an official resolution saying,
“These shares are now forfeited due to non-payment.”

This decision is carefully recorded in the company’s records. It’s official now.

4. Say Goodbye: Shares are Cancelled

Once forfeited, the shareholder’s rights vanish. The company cancels those shares, and the shareholder loses all the money they already paid for them. 

5. Final Update: Shareholder is Informed

The defaulting shareholder receives a letter that says: "Your shares have been forfeited. Please return the certificates, if any."
They are no longer part of the company’s shareholding.

6. A Fresh Start: Reissue of Shares (Optional)

Now the company has a choice. They can reissue those shares to new investors, often at a new price.
It’s like giving someone else a chance to take that vacant seat at the table!

What Are The Effects of Forfeiture on Shareholders?

Forfeiture of shares means losing ownership due to unpaid dues or calls. It results in financial loss, cancelled rights, and possible damage to reputation.

Let’s understand it with the help of an example:

Let’s say Ravi was allotted 100 shares at ₹10 each (₹1,000 total). He paid ₹300 on application and ₹400 on allotment, totalling ₹700. However, he failed to pay the final call of ₹300. As a result, his shares were forfeited, and he lost both ownership and the ₹700 paid.

Now, the company forfeits its shares. Here’s what happens:

When a shareholder fails to pay the due amount, the company can forfeit their shares. The table below explains the impact of forfeiture across different areas, with Ravi’s case as an example.
 

This table clearly shows that share forfeiture not only causes financial loss but also damages reputation, while allowing the company to reissue the shares.

That means Ravi paid ₹700 but skipped the last ₹300. He lost both his shares and the ₹700 already paid. The company can then reissue those shares, sometimes at a lower price. This process is called share forfeiture, a financial and legal outcome of failing to meet payment obligations in a company.

Also Read - What is a Balance Sheet : Meaning, Format, Importance & Components

Difference Between Forfeiture and Surrender of Shares:

Understanding the difference between forfeiture and surrender of shares is important, as both involve the return of shares to the company, but under different circumstances and procedures.

While both forfeiture and surrender result in the loss of shareholder rights, the main difference lies in who initiates the action and the reasons behind it, making it essential for companies to handle each case as per their legal framework.

Conclusion:

Forfeiture of shares happens when a company takes back shares because the person didn’t pay on time. The person loses their shares, rights, and even the money they paid earlier. The company may sell those shares again. It’s different from surrender, where the person gives up shares willingly. So, always pay on time to keep your shares safe and active!

FAQs:

Q1: Why do companies forfeit shares?

Companies forfeit shares when shareholders fail to pay dues like allotment or call money, following legal procedures.

Q2: What is the provision of forfeiture?

A forfeiture provision allows a company to cancel shares if a shareholder fails to meet payment obligations. It acts as a penalty for non-compliance with agreed terms.

Q3: What is the forfeiture period?
The forfeiture period is a three-year timeframe after a company's restated financial year, during which certain rights or shares may be forfeited. It applies only if the restatement occurs within that period.

Q. What are the conditions for forfeit?

A forfeiture clause states that if a party fails to meet agreed obligations, they lose rights, property, or money as a penalty.
 

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LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.