Procedures and Legalities of Re-issuing Forfeited Shares

When a shareholder fails to pay a call on their shares, a company can forfeit those shares under the authority given in its Articles of Association. But forfeiture is only half the story. A company cannot let forfeited shares sit idle forever, since they represent unpaid capital that the business could otherwise put to use. This is where re-issue of forfeited shares comes in. It is the process of selling these shares to a new buyer, and it comes with its own set of legal conditions, pricing limits, and accounting entries that every commerce student needs to understand clearly.

A quick recap: what happens on forfeiture 🔗

Before a share can be re-issued, it must first be forfeited. This happens when a shareholder does not pay a call, such as the allotment money or a later call on the shares, even after the company sends a formal notice demanding payment. According to the Secretarial Standard on Forfeiture of Shares issued by the Institute of Company Secretaries of India, the company must give the defaulting member at least 21 days’ notice from the date of posting before the shares can actually be forfeited, and the Board must approve the forfeiture at a duly convened meeting.

Once forfeited, the shareholder loses ownership of the shares along with whatever amount they had already paid. The company simply retains this money. It gets recorded in a Share Forfeiture Account, and this balance becomes important later when the shares are re-issued.

What does re-issue of forfeited shares actually mean 🔗

Re-issue means the company disposes of these forfeited shares to a new investor. Importantly, this is treated as a sale of existing shares, not the creation of new ones. As the ICSI Secretarial Standard clarifies, a forfeited share may be re-issued or otherwise disposed of on such terms as the Board thinks fit, and this transaction is legally a sale, not a fresh allotment. This distinction matters a lot, both legally and procedurally, and we will get into why shortly.

The legal framework governing re-issue 🔗

The Companies Act, 2013 itself does not lay down a detailed, standalone procedure for forfeiture or re-issue. Instead, this power flows from the company’s Articles of Association, read together with regulations under Table F of Schedule I of the Act, which most companies adopt as a model. As The Legal Quotient explains, a company can only forfeit and later re-issue shares if its Articles specifically authorise it.

On top of the Articles, the ICSI Secretarial Standard on Forfeiture of Shares provides the practical benchmark that most companies and their secretarial teams follow while re-issuing forfeited shares. It sets out three important conditions:

1. Pricing power lies with the Board 🔗

The Board of Directors has the discretion to decide the terms on which forfeited shares are re-issued, including the price. This flexibility is what allows a company to re-issue shares at par, at a premium, or at a discount, depending on what makes commercial sense at the time.

2. There is a floor price 🔗

The re-issue price cannot be set arbitrarily low. Per the ICSI standard, the price fixed by the directors should not be lower than the amount of the call or calls that remained due and unpaid on the share at the time of forfeiture. In simpler terms, the company must at least recover what it originally lost.

3. The discount cannot exceed the forfeited amount 🔗

This is the rule most commerce textbooks emphasise. The shares can be re-issued at a discount, but that discount must not be more than the amount already forfeited on those shares. TaxGuru’s guide to share forfeiture notes that companies often deliberately re-issue at a discounted price specifically to adjust and clear out the balance sitting in the Share Forfeiture Account. As long as the sum of the amount already received from the original shareholder and the new re-issue price is not less than the face value of the share, the company suffers no real loss of capital.

Listed companies face an additional layer 🔗

If a company’s shares are listed on a recognised stock exchange, re-issue of forfeited shares cannot happen purely at the Board’s discretion. The Secretarial Standard requires such companies to also comply with SEBI’s guidelines for preferential issue of securities and the listing agreement. This adds an extra layer of regulatory oversight, since these shares are effectively being offered to a new investor in a public market context, and SEBI wants to make sure existing shareholders and market integrity are both protected.

Step-by-step procedure for re-issuing forfeited shares 🔗

While the exact internal process can vary slightly between companies, the broadly accepted procedure, as outlined by 5paisa’s explainer on forfeited shares and the ICSI standard, looks like this:

Notice that nowhere in this process does the company need to file a fresh return of allotment. That is a deliberate legal consequence of treating re-issue as a sale rather than a new issue of capital.

Why re-issue does not require a return of allotment 🔗

Under the Companies Act, whenever a company allots new shares, it must file a return of allotment, commonly known as Form PAS-3, with the Registrar of Companies within 30 days. This filing is a compliance requirement specifically tied to the creation of new share capital.

Re-issue of forfeited shares sidesteps this requirement entirely. Since the shares already exist and were already allotted once, re-issuing them to a new buyer is legally equivalent to a transfer, not a fresh allotment. The ICSI Secretarial Standard states this explicitly, describing re-issue as a sale that does not amount to an allotment. This is a favourite conceptual question in exams, precisely because it tests whether students understand the underlying legal character of the transaction rather than just memorising the process.

Accounting treatment: the entries you need to know 🔗

From an accounting standpoint, re-issue affects three accounts: Bank, Share Capital, and Share Forfeiture. The exact entry depends on whether the shares are re-issued at par, premium, or discount. As GeeksforGeeks’ breakdown of these entries shows, the general pattern is straightforward:

After the re-issue, any balance left over in the Share Forfeiture Account, once the discount has been adjusted, is not treated as regular profit. Because it represents a gain of a capital nature, it is transferred to the Capital Reserve Account rather than to the profit and loss statement.

A worked example 🔗

Suppose a company forfeits 200 equity shares of ₹10 each, on which ₹7 per share had already been received before default (₹3 per share remained unpaid). The Share Forfeiture Account would show a credit balance of ₹1,400 (200 shares × ₹7).

If the company now re-issues these 200 shares as fully paid-up at ₹8 per share, the discount allowed is ₹2 per share, or ₹400 in total. This is well within the ₹1,400 available in the Share Forfeiture Account, so the discount rule is satisfied. The entry would debit Bank with ₹1,600 (200 × ₹8) and Share Forfeiture Account with ₹400, crediting Share Capital with the full ₹2,000 face value. The remaining balance in the Share Forfeiture Account, ₹1,000, is then transferred to Capital Reserve, since it represents a genuine capital gain for the company.

Why this matters beyond the exam 🔗

Re-issue of forfeited shares gives a company a practical way to recover capital that would otherwise remain locked up due to a defaulting shareholder. It restores the paid-up share capital to its intended level, brings in a new investor, and clears out the Share Forfeiture Account in a transparent, rule-bound manner. For a commerce student, understanding this topic well also builds a stronger grip on related concepts like share capital structure, calls in arrears, and the difference between allotment and transfer, all of which come up repeatedly across Company Law and Corporate Accounting papers.

What do you think? If you were on a company’s Board, would you prefer re-issuing forfeited shares quickly at a discount to clear the books, or holding out for a buyer willing to pay closer to face value? And why do you think Indian company law treats re-issue as a sale rather than a fresh allotment, even though a brand new shareholder is stepping in?

References

1. https://icsi.edu/finalss9/
2. https://thelegalquotient.com/corporate-laws/companies-act/forfeiture-of-shares/838/
3. https://www.taxguru.in/company-law/guide-forfeiture-shares.html
4. https://www.5paisa.com/stock-market-guide/stock-share-market/forfeited-shares
5. https://www.geeksforgeeks.org/accountancy/accounting-entries-on-re-issue-of-forfeited-shares/