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S. S. JAIN SUBODH LAW COLLEGE

Company Law-II

PAPER NUMBER: - 6.28

Share and its forfeiture

Submission To: - Submitted By: -


Ms. ANKITA SHARMA Babu Lal
Assistant Professor VI SEM (A)
ROLL NO. 14
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DECLARATION

I, BABU LAL, do hereby declare that, this project titled “Share and its forfeiture” is an
outcome of the research conducted by me under the guidance of Ms. ANKITA SHARMA
(Asst. Prof. of Company Law) at S.S. Jain Subodh Law College in fulfilment for the award of
the degree of B.A.LL. B at the University of Rajasthan.

I also declare that, this work is original, except where assistance from other sources has been
taken and necessary acknowledgements for the same have been made at appropriate places. I
further declare that, this work has not been submitted either in whole or in part, for any
degree or equivalent in any other institution.

DATE: 30-04-2018

PLACE: S. S. JAIN SUBODH LAW COLLEGE

NAME: BABU LAL


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CERTIFICATE

This is to certify that, the project titled “Share and its forfeiture “submitted by BABU
LAL in fulfilment for the award of the degree of B.A.LL. B at S.S. Jain Subodh Law College
is the product of research carried out under my guidance and supervision.

Ms. ANKITA SHARMA

ASST. PROF. OF COMPANY LAW


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ACKNOWLEDGEMENT

I acknowledge with profundity, my obligation to Almighty God and my parents for giving me
the grace to accomplish my work, without which this project would not have been possible.

I express my heartful gratitude to my respected faculty Ms. ANKITA SHARMA (Asst. Prof.
of Company Law) for providing me with valuable suggestions to complete this dissertation.

I am especially grateful to all my faculty members at S.S Jain Subodh Law College who have
helped me imbibe the basic research and writing skills.

Lastly, I take upon myself, the drawbacks and limitations of this study, if any.

DATE: 30.04.2018

PLACE: S.S. JAIN SUBODH LAW COLLEGE

NAME: BABU LAL


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TABLE OF CONTENT

(i) Declaration…………………………………………………………2

(ii) Certificate………………………………………………………….3

(iii)Acknowledgement………………………………………………....4

(iv) Research Methodology…………………………………………….6

 Statement of Research Problem……………………………. 6


 Objective…………………………………………………….6
 Research Design…………………………………………….7
 Locale of Study……………………………………………...7
 Sources of Data……………………………………………...7
 Method of Writing and Mode of Citation…………………... 7
(v) Introduction………………………………………………………… 8

(vi) Definition of Share………………………………………………….8

(vii) Nature of a Share …………………………………………………..8

(viii) Share holder……………………………………………………….. 9

(ix) Share Certificate………………………………………………….....9

(x) Share v. Stock…………………………………………………….. ..9

(xi) Kinds of Shares……………………………………………………. 11

(xii) Share forfeiture……………………………………………………..12

(xiii) Procedure of forfeiture of Shares…………………………………....12

(xiv) Conditions for forfeiture of shares…………………………………13

(xv) Reissue of forfeited shares…………………………………………13

(xvi) Conclusion……………………………………………………….....14

(xvii) Bibliography………………………………………………………. 15
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Statement of research problem

 What is Share?
 How to forfeiture of share?

Objectives:

1. To understand the meaning of share.


2. To study the forfeiture of share.
3. explain the meaning of forfeiture of Shares
4. explain the situations in which shares can be forfeited;
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RESEARCH METHODOLOGY

Research Design:

The researchers have followed Doctrinal method. It is concerned with qualitative


phenomenon that is, related to quality or kind. It aims at discovering the underlying motives
and desires using in depth interviews for the purpose. It is also called attitude or opinion
research. It’s designed to find out how people think or what they think about a particular
subject.

Locale of Study:

In this project the researcher has tried to include different aspects pertaining to the concept of
“Share & its forfeiture”.

Sources of Data:

Secondary resources are collected from outside either from a public source or someone else
who has already worked on the subject.

The following secondary sources of data have been used in the project-

• Books and Websites


• Articles
• E- newspapers
• E- Books

Method of Writing and Mode of Citation:

The method of writing followed in the course of this research project is primarily analytical.
It involves a careful examination and evaluation of something in order to understand it or
explain it or draw inferences or conclusions from it. In legal research, it is used to analyse
and examine the nature, purpose and adequacy of law in any particular area.

The researcher has followed Uniform method of citation throughout the course of this
research project. The researcher has used the Chicago method of citation.
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Introduction

a part or portion of a larger amount which is divided among a number of people, or to which
a number of people contribute. An organization in order to raise money divides its entire
capital into small units of equal value. Each unit is called a share.
A share is nothing but an indivisible unit of a company’s capital to be sold among individuals
to increase profit of the organization.
The capital of a company is divided into a number of indivisible units of a fixed amount.
These units are known as ‘shares’.
In case Supreme Court defined a share as “a right to participate in the profits made by a
company, while it is a going concern and declares a divided, and in the assets of the company
when it is wound up [Bucha F. Guzdarv v. Commissioner of Income-tax, Bombay LR 617
(SC)].

Definition of “Share”
Sub-section 84 of Section 2 of the Companies Act,2013 defines ‘Share’ as below: “Share”
means a share in the share capital of a company and includes stock.
Shares is one types of securities is defined in Sub-section 81 of section 21 of the said Act,
which refers to the definition of the securities as defined in clause (h) of section 2 of the
Securities Contracts (Regulation) Act, 1956.

Nature of a share
A ‘share’ is not a sum of money but is the interest of shareholder in the company measured
by a sum of money for the purpose of liability in the first place, and of interest in the second,
but also consisting of a series of mutual ‘covenants’ entered by all the shareholders inter se
[Borland’s Trustees v. Steel Bros. & Co. Ltd. [1901]2
A share is a chose-in-action. A chose-in-action implies the existence of some person entitled
to the rights, which are rights in action as distinct from rights in possession, and until the
share is issued no such person exists.3
In India, a share is regarded as ‘goods’. Section 2(7) of the Sale of Goods Act,1930 defines
‘goods’ to mean any kind of movable property other than actionable claims and money and

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“securities” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation)
Act, 1956 (42 of 1956);
2
Vishwanath v. East India Distilleries [1957] 27 Comp.Cas.175
3
See Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. [1963] 33 Comp. Cas. 862 (SC).
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includes stock and shares. However, section 44 of the Companies Act, while recognising
shares as movable property, suggests that they shall be transferable only in the manner
provided by the articles of the company.
In Vishwanathan v. East India Distilleries [1957] 27 Comp. Cas.175, it was observed:

Shareholder
An individual owning one or more than one share of an organization is called a shareholder.
In simpler words, an individual purchasing one or more than one share from any private or
public organization is called a shareholder.A shareholder can sell his shares anytime
depending on the current value of the share.He/she can purchase any new share issued by any
other or same organization.A shareholder has the right to declared dividend.

Share certificates
Historically, investors were given share certificates as evidence of their ownership of shares.
In modern times, certificates are not always given and ownership may be recorded
electronically by a system such as CREST or DTCC, a central securities depository.

Share v. Stock
Once again, these two expressions need to be distinguished for clarity. As already noted, a
share represents a unit into which the capital of a company is divided. Thus, if the share
capital of the company is Rs.5 lakhs divided into 50,000 units of Rs.10, each units of Rs.10
shall be called a share of the company.
The term ‘stock’ on the other hand may be defined as the aggregate of fully paid. Up shares
of a member merged into one fund of equal value. It is a set of shares put together in a
bundle. The ‘Stock’ is expressed in terms of money and not as so many shares. Stock can be
divided into fractions of any amount and such fractions may be transferred like shares.
A company cannot make an original issue of the stock. A Company limited by shares may, if
authorised by its Articles, by a resolution passed in the general meeting, convert all or any of
its fully paid-up shares into stock. On conversion into stock, the register of member must
show the amount of stock held by each member instead of the number of shares. The
conversion does not affect the rights of the members in any way.
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Following are the main pints of difference:


Share Stock
1. A share has a nominal value 1. A stock has no nominal value.
2. A share has a distinctive number which 2. A stock bears no such number
distinguishes it from other shares.
3. Originally Shares can only be issued. 3. A company cannot make an original issue
of stock. Stock can be issued by an existing
company by converting its fully paid- up
shares.
4. A share may be either be fully paid-up or 4. A stock can never be partly paid-up. It is
partly paid up. always fully paid-up.
5. A share cannot be transferred in fractions. 5. A stock may be transferred in any
It is transferred as a whole. fractions.
6. All the share of a class are of equal 6. Stock may be of different denominations.
denomination.

Kinds of shares
As per the Companies Act, 2013, only two kinds of shares can be issued by a company.
Section 43 of the Act provides that the share capital of a company limited by shares shall be
of two kinds only, namely:
(a) Equity share capital-
(i) With voting rights, or
(ii) With differential rights as to dividend, voting or otherwise in accordance with
such rules and subject to such conditions as may be prescribed;4
(b) Preference share capital.
Besides, a company may also issue Global Depository Receipts (GDRs) under section 41.

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The articles of association of the company authorizes the issue of shares with differential rights;
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Equity shares
The equity shares are those shares which are not preference shares. In other words, shares
which do not enjoy any preferential right in the matter of payment of dividend or repayment
of capital, are known as equity shares. After satisfying the rights of preference shares, the
equity shares shall be entitled to share in the remaining amount of distributable profits of the
company. The dividend on equity shares is not fixed and may vary from year to year
depending upon the amount of profits available. The rate of dividend is recommended by the
Board of directors of the company and declared by shareholders in the annual general
meeting.

Every member of a company limited by shares and holding equity share capital therein, shall
have:
(a) A right to vote on every resolution placed before the company; and
(b) His voting rights, on a poll, shall be in proportion to his share in the paid- up equity
share capital of the company.
As compared to this, the holders of preference shares can vote only on such resolutions
which directly affect the rights attached to the preference shares and, any resolution for
the winding up of the company or for the repayment or reduction of its equity or
preference share capital. However, if the preference dividend is not paid for two years or
more, the preference shareholders shall also get voting right on every resolution placed
before the company (Section 47.)5
Voting rights of preference shareholder, on a poll, shall be in proportion to his share in the
paid-up preference share capital of the company.

Preference Shares or Preference Share Capital


Preference share capital means that part of the share capital of the company which fulfils both
the following requirements:
(i) During the life of the company it must be assured of a preferential dividend. The
preferential dividend may consist of a fixed amount (say, one lakh rupees) payable
to preference shareholders before anything else is paid to the equity shareholders.
Alternatively, the amount payable as preferential dividend may be calculated at a
fixed rate, e.g., 10% of the nominal value of each share.

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Voting rights.
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(ii) On the winding-up of the company it must carry as preferential rights to be paid,
i.e., amount paid up on preference shares must be paid back before anything is
paid to the equity shareholders.
Types of Preference Shares:
a. Participating non-participating
b. Cumulative and non-cumulative shares
c. Redeemable and Irredeemable Preference shares

Share forfeiture

A forfeited share is a share in a company that the owner loses (forfeits) by failing to meet the
purchase requirements. Requirements may include paying an allotment or call money owed,
or avoiding selling or transferring shares during a restricted period. When a share is forfeited,
the shareholder no longer owes any remaining balance, surrenders any potential capital
gain on the shares and the shares become the property of the issuing company.

Share forfeiture is the process by which the directors of a company cancel the power of
a shareholder if he does not pay his call money when the company demands for it. The
company will give 14 days' notice; after 14 days if the shareholder does not pay the company
will forfeit his shares and strike his name from the register of shareholders. The company will
not repay the funds received from the shareholder. In order to do share forfeiture the Articles
of Association of the company should contain a provision for that.

Procedure of forfeiture of shares


The authority to forfeit shares is given to the Board of Directors in Articles of Association of
the company. The Board of Directors has to give at least fourteen days notice to the
defaulting members calling upon them to pay outstanding amount with or without interest as
the case may be before the specified date. The notice must also state that if the shareholders
fail to remit the amount mentioned therein within the stipulated period, their shares will be
forfeited. If they still fail to pay the amount within the specified period of time, the Board of
Directors of the company may decide to forfeit such shares by passing a resolution. The
decision regarding the forfeiture of shares should be communicated to the concerned allotters
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and should be asked to return the allotment letters and share certificates of the forfeited
shares to the company.

Conditions for Forfeiture of shares


A company can forfeit its shares only when the following conditions are satisfied:
 Authority to Forfeit: The power to forfeit must be expressly given in the Articles.
Accordingly, if no power is given in the Articles, no forfeiture can be made.
 Default in Payment of Calls: The shares can be forfeited only for the non-payment
of calls and not for the default in payment of any other debts.

 In Accordance with the Articles: Forfeiture shall be valid only when the provisions
of the Articles are strictly complied with. Even a slight deviation from the provisions
shall render the forfeiture invalid.

 Bonafide and for the Benefit of the Company: The right to forfeit shares is in the
nature of trust and so it can be exercised bonafide and only for the benefit of the
company. The power cannot be exercised hastly or for private ends.

 Board Resolutions: Forfeiture will be effected only by means of a Board resolution.

 Notice to Defaulting Shareholder: Notice precedent to forfeiture must be given to


the defaulting shareholder. In the matter of forfeiture of shares, technicalities must be
strictly observed.

Reissue of Forfeited Shares


Forfeited shares are the property of the issuing company. The issuing company can reissue
forfeited shares at par, a premium or a discount as determined by the board of directors.
Typically, forfeited shares are reissued at a discount i.e., at a price below their nominal value.
If the shares were initially issued at par, the maximum discount for the reissued stock is equal
to the amount forfeited on the shares. Reissued shares must not be discounted more than the
amount forfeited on them. If a company’s articles of association permits, the board of
directors may reissue forfeited shares to a third party, but not back to a shareholder that has
defaulted
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Conclusion
Therefore I conclude that the forfeiture is withdrawal of shares due to non-payment of any
call by the shareholder or for any other ground as may be provided in the project. On
forfeiture of shares the member loses the amount paid thereon and his interest in the
ownership of the shares. Notice should be served by the company on the defaulting member
by registered post acknowledgment due.
Equity shares have both advantages and disadvantages but the fact is that equity shares are
the most sought financial instruments for both investment or for speculation.
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BIBLIOGRAPHY

Books Referred

 Company Law by Avtar Singh Publication Eastern Book Company, 16th Edition.
 Company Law & Practice by A.K Majmudar and Dr. G.K. Kapoor Taxmann
Publication 16th Edition.

Websites Referred

 https://www.investopedia.com/terms/f/forfeited-share.asp
 https://en.wikipedia.org/wiki/Share_forfeiture
 https://accountlearning.com