Forfeiture and Re-issue of Shares

Forfeiture and Reissue of Shares

Forfeiture of Shares

Forfeiture of shares refers to the cancellation of shares by a company when a shareholder fails to pay the due amount on allotment or calls by the specified date. Here's a detailed explanation of the process and implications of share forfeiture:

• Failure to Pay Allotment or Call Money:
  • When shareholders do not pay the required allotment or call money by the due date, the company can forfeit their shares.
• Articles of Association:
  • The company’s Articles of Association must empower the Board of Directors to forfeit shares. The procedure for forfeiture is typically outlined in these articles.
• Notice to Defaulter:
  • A notice is served to the defaulting shareholder, requiring them to pay the unpaid amount along with any accrued interest by a certain date.
  • The notice must clearly state that if the payment is not made by the specified date, the shares will be liable to forfeiture.
• Forfeiture Process:
  • If the shareholder does not pay the due amount by the specified date, the Board of Directors can pass a resolution to forfeit the shares.
  • Upon forfeiture, the shareholder’s name is removed from the register of members, and any amount already paid on those shares is forfeited to the company.
  • The forfeited amount represents a capital gain for the company and is credited to the Forfeited Shares Account.
• Impact on Shareholder:
  • The shareholder loses all rights to the forfeited shares, including any claim to dividends or other benefits.
  • The company retains the forfeited amount as part of its capital.

Reissue of Forfeited Shares

After shares are forfeited, they become available for reissue. The process of reissuing forfeited shares involves several key steps:

• Resolution for Reissue:
  • The company must pass a resolution in its Board Meeting to reissue the forfeited shares.
  • Reissuing forfeited shares is considered a sale of shares rather than a new allotment.
• Auction and Disposal:
  • The company auctions the forfeited shares to new buyers.
  • The company can set any price for the reissue, but the total amount received from both the original shareholder and the new buyer must not be less than the arrear amount on the shares.
• Price Consideration:
  • For example, if a shareholder paid ₹3 per share on application for 100 shares with a face value of ₹10 but failed to pay the remaining ₹7, the company can reissue these shares at any price equal to or greater than ₹7 per share.
• Accounting for Reissue:
  • The Forfeited Shares Account is credited with the amount forfeited, representing a capital gain.
  • When only part of the forfeited shares are reissued, the corresponding profit from those shares is transferred to the Capital Reserve.
  • If shares are reissued at a price higher than their face value, the excess amount is transferred to the Securities Premium Account.
• Capital Reserve and Securities Premium:
  • Profit from reissued shares is moved to the Capital Reserve.
  • Any premium received over the face value is transferred to the Securities Premium Account.

Practical Example

• Suppose a company issues 100 shares with a face value of ₹10 each. A shareholder, A, pays the application money of ₹3 per share but fails to pay the allotment money of ₹7 per share. The company forfeits these shares and later reissues them.
• If the arrear amount is ₹7 per share, the company can reissue these shares at ₹7 or more. If reissued at ₹7, the company collects the arrear amount; if reissued at a higher price, the excess goes to the Securities Premium Account.

Key Points

• Forfeiture and reissue of shares are crucial for maintaining financial discipline and ensuring the company’s capital needs are met.
• The process protects the company from defaults and ensures funds are available for business operations and growth.
• Reissuing forfeited shares helps the company recover lost capital and potentially gain additional funds through premiums.

Understanding these mechanisms is vital for both companies and investors to manage and evaluate their financial and investment strategies effectively.