What is Forfeiture of Shares?

S7-SA7-0313

Grade Level:

Class 12

AI/ML, Physics, Biotechnology, FinTech, EVs, Space Technology, Climate Science, Blockchain, Medicine, Engineering, Law, Economics

Definition

What is it?

Forfeiture of shares means a company cancels or takes back shares from a shareholder who has failed to pay the 'call money' or other amounts due on those shares. It's like a penalty for not paying your dues, and the money already paid on those shares is usually lost to the company.

Simple Example

Quick Example

Imagine you pre-ordered a new video game by paying an advance. The shop says you need to pay the remaining amount by a certain date. If you don't pay by then, the shop cancels your order, keeps your advance, and sells the game to someone else. Forfeiture of shares is similar; the company takes back the shares and keeps the money already paid because the shareholder didn't pay the full amount.

Worked Example

Step-by-Step

A company issued 1,000 shares at Rs. 10 each.
---The payment schedule was: Rs. 3 on application, Rs. 2 on allotment, and Rs. 5 on first and final call.
---A shareholder, Mr. Sharma, held 100 shares. He paid the application money (Rs. 3) and allotment money (Rs. 2) but failed to pay the first and final call (Rs. 5).
---The company decided to forfeit Mr. Sharma's 100 shares.
---Amount paid by Mr. Sharma: 100 shares * (Rs. 3 + Rs. 2) = Rs. 500.
---Amount due but not paid: 100 shares * Rs. 5 = Rs. 500.
---After forfeiture, Mr. Sharma loses his 100 shares, and the company keeps the Rs. 500 he had already paid. The company will then try to re-issue these forfeited shares.
---Answer: Mr. Sharma's 100 shares are forfeited, and the company retains Rs. 500.

Why It Matters

Understanding forfeiture helps in FinTech to analyze company financial health and in Law to understand shareholder rights and obligations. Future financial analysts, corporate lawyers, and entrepreneurs need to know this to manage company capital and ensure fair practices.

Common Mistakes

MISTAKE: Thinking forfeited shares can be re-issued at any price. | CORRECTION: Forfeited shares can be re-issued, but the re-issue price plus the amount already received on forfeiture must be at least equal to the original face value of the shares.

MISTAKE: Believing the entire amount paid by the shareholder is returned. | CORRECTION: In forfeiture, the money already paid by the defaulting shareholder (e.g., application and allotment money) is usually kept by the company and is not returned.

MISTAKE: Confusing forfeiture with surrender of shares. | CORRECTION: Forfeiture is when the company forces cancellation due to non-payment, while surrender is when a shareholder voluntarily gives up shares to the company.

Practice Questions

Try It Yourself

QUESTION: A company issued shares of Rs. 20 each. Application money was Rs. 5, allotment Rs. 5, and first call Rs. 10. A shareholder with 50 shares paid application and allotment but failed to pay the first call. How much money will the company keep if these shares are forfeited? | ANSWER: Rs. 500 (50 shares * (Rs. 5 + Rs. 5))

QUESTION: Why is forfeiture of shares necessary for a company? | ANSWER: It's necessary to ensure shareholders pay their dues, maintain the company's capital structure, and allow the company to recover unpaid amounts by re-issuing the shares.

QUESTION: Rohan held 200 shares of Rs. 10 each, on which Rs. 7 was called up (Rs. 2 on application, Rs. 3 on allotment, Rs. 2 on first call). He paid application and allotment money but failed to pay the first call. The company forfeited his shares. What is the total amount forfeited by the company, and how much was unpaid? | ANSWER: Amount forfeited (kept by company): 200 shares * (Rs. 2 + Rs. 3) = Rs. 1,000. Unpaid amount: 200 shares * Rs. 2 = Rs. 400.

MCQ

Quick Quiz

What is the primary reason for a company to forfeit shares?

The shareholder wants to sell their shares.

The shareholder failed to pay the call money on shares.

The company wants to reduce its share capital.

The shares were issued at a premium.

The Correct Answer Is:

Forfeiture happens when a shareholder fails to pay amounts due (like call money) on their shares, not because they want to sell or the company wants to reduce capital. Premium issue is unrelated.

Real World Connection

In the Real World

In India, companies listed on the stock exchange, like Reliance or TCS, sometimes have shareholders who don't pay their dues. While less common for publicly traded shares, in private companies or during initial public offerings (IPOs) where payments are staggered, forfeiture provisions are crucial. Financial professionals working in investment banking or corporate finance constantly deal with regulations surrounding share capital and shareholder obligations.

Key Vocabulary

Key Terms

FORFEITURE: Company cancels shares due to non-payment | CALL MONEY: The part of the share price that the company asks shareholders to pay after application and allotment | SHAREHOLDER: A person or entity who owns shares in a company | FACE VALUE: The nominal or par value of a share, printed on the share certificate

What's Next

What to Learn Next

Now that you understand forfeiture, you should learn about 'Re-issue of Forfeited Shares'. This concept explains what happens to the shares after they are forfeited and how a company can sell them again to new investors, which is an important next step in managing company capital.