Companies Act 2013: Forfeiture of Shares Explained
Table of Contents
Introduction
Under India’s Companies Act 2013, the forfeiture of shares , partially paid equity shares is crucial to corporate governance. This procedure allows businesses to deal with shareholders who fail to pay for their shares while upholding their financial integrity.
The legal aspect of share forfeiture is significant, and in India, it is regulated by the Companies Act of 2013. However, the company’s articles of association, which set forth its operating guidelines, govern the process and legality of share forfeiture.
Legal Structure
It is crucial to comprehend the legal ramifications about forfeiture of shares in India, as outlined in the Companies Act of 2013. In particular, the company’s articles of association set forth the business’s management guidelines and regulated the process and legality of share forfeiture.
Although the Companies Act doesn’t specifically cover share forfeiture, companies can include its provisions in their articles. The Companies Act of 2013′s Table F of Schedule I contains provisions about forfeiture of share , numbered 28 to 34.
Most businesses have a provision in their articles of association that says the company can lose shares if a shareholder doesn’t pay the outstanding balance by a specific date. This power can only be used in good faith, which means the business must behave adequately and cannot simply forfeit shares without cause.
The Meaning of Forfeiture
Canceling shares due to shareholders’ nonpayment is known as forfeiture. This can happen if stockholders pay less than the total price that the corporation demands for their shares.
Reason for Forfeiture
Ensuring that shareholders fulfill their financial responsibilities to the corporation is the primary goal of forfeiture. The corporation can preserve the integrity of its share capital and safeguard its interests by forfeiting of shares.
Causes for Forfeiture of Shares
There are various situations in which forfeiture of shares may happen. To maintain compliance with regulations and prevent unanticipated circumstances, firms and shareholders need to comprehend these events. The following crucial circumstances could result in forfeiture of shares:
- Non-payment of Calls: Not paying calls is the most frequent reason for share loss. A “call” is a request to pay the outstanding balance on the shares issued by the corporation. The corporation may forfeit a shareholder’s shares if they do not pay this amount within the allotted time.
- Breach of Company Rules: Shareholders may also lose their shares if they violate the guidelines outlined in the company’s articles of association. These guidelines may cover anything from financial obligations to behavior inside the organization. If these guidelines are broken, the business can enforce forfeiture of shares.
- Other Reasons: A business may use its right to forfeit shares in different situations. These may be specific to the shareholder agreement or the company’s articles of association. For instance, if a shareholder engages in actions that damage the business’s interests or reputation, the corporation may retain the right to seize shares.
Observe that the Companies Act of 2013’s regulations and the particular provisions in the articles of organization govern any scenario involving the forfeiture of shares.
Post Forfeiture: Implications and Effects of Forfeiture of Shares
Effect on Ownership and Share Capital
The company’s share capital is decreased by share forfeiture, which also has the potential to alter the ownership structure. It may also impact the remaining shareholders’ dividends and their voting ability.
Impacts on the Finances of the Company
The forfeiture of partially paid equity shares may impact the company’s finances because it can strengthen its position financially, recoup the outstanding debt, and obtain further funds by issuing new shares to investors.
Companies can utilize share forfeiture as a solid instrument to safeguard their interests. Nevertheless, it is crucial to use this instrument responsibly and in compliance with the law.
Businesses may stay out of legal hot water and ensure they’re employing the technique fairly by being aware of the law regarding share forfeiture and adhering to the proper processes.
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