Forfeiture of Shares

Forfeiture of shares is a mechanism that allows a company to reclaim shares when a shareholder defaults on a payment obligation arising from a valid call made on partly paid shares. In the modern Indian equity landscape, fully paid shares constitute virtually the entire listed market, making forfeiture of shares a relatively rare event for investors in listed equities. However, the concept remains practically relevant for unlisted companies, closely held private entities with partly paid share structures, and IPO allottees who default on application money or allotment money in phased payment structures.

The procedure for forfeiture is governed by the Articles of Association of the company, which must be read alongside the Companies Act 2013. The company must first make a valid call on shares — a formal demand for payment of an outstanding instalment on partly paid shares — in accordance with the articles. If the shareholder fails to pay by the specified date, the company issues a forfeiture notice specifying a final date by which payment must be made and warning that failure will result in forfeiture. Only after the notice period expires without payment can the board pass a resolution forfeiting the shares.

Upon forfeiture, the shareholder loses all rights in the shares — voting rights, dividend entitlement, and economic interest. The amounts previously paid on the forfeited shares are not automatically refunded; they are retained by the company as compensation for the default, subject to any specific provision in the articles. The forfeited shares are extinguished from the shareholder's name and held by the company.

The company may then reissue the forfeited shares. The reissue price cannot be less than the amount already forfeited on the shares. If the reissue price is higher than the par value of the shares after accounting for previous payments, the excess may be retained as a capital receipt. If the company is unable to reissue the shares within a prescribed period, it must cancel them, effectively reducing its share capital — a process that mirrors a capital reduction under Section 66.

For listed companies, any forfeiture and reissue of shares requires appropriate disclosure under SEBI LODR to ensure that the market has contemporaneous information about changes in the company's capital structure and ownership profile. The procedural steps involved — proper call notice, forfeiture notice, board resolution, and reissue — must be carefully documented to withstand legal challenge by the defaulting shareholder.