India: Forfeiture Of Partly Paid Up Shares - Exemption From Takeover Regulations

Last Updated: 8 March 2016
Article by Singh & Associates

Most Read Contributor in India, September 2016

The Securities and Exchange Board of India (SEBI) vide its press release dated 30th November 2015 amended the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 for providing exemption from making an open offer for entities whose shareholding in a listed company increases due to forfeiture of shares.

The amendment was in line with the discussion paper issued by SEBI in August 2015 for seeking public comments on the issue. SEBI stated that Increase in voting rights of any shareholder as a result of forfeiture of partly paid-up shares held by some shareholders is passive in nature as the process is initiated due to non-payment of call money by defaulting shareholders. Similarly, accrual of voting rights to the remaining shareholders, computed on pro rata basis, upon the expiry of call notice issued to the shareholders holding partly paid-up shares is also passive in nature.


  • As per SEBI's SAST regulations, any entity having over 25 per cent stake in a listed firm can hike the shareholding by up to 5 per cent in a financial year. If the limit is breached in a financial year, then that entity would have to make an open offer.
  • Currently, there is no provision for exemptions under the Takeover Regulations in case of increase in the voting rights of a shareholder due to the expiry of call notice period and forfeiture of partly paid-up shares and an application has to be filed with SEBI for seeking exemption from the open offer obligations in this regard under regulation 11 of the SAST Regulations, 2011.
  • If a member fails to pay any call, or installment of a call, on the day appointed for payment thereof,

i. the Board may, at any time thereafter serve a notice on him requiring payment of so much of the call or installment as is unpaid, together with any interest which may have accrued.

ii. The board or committee thereof shall pass a resolution authorizing the forfeiture of share and issue of notice for this purpose.

iii. If the call money is not paid in response to such notice threatening forfeiture, the company may, at any time thereafter, before the payment required by the notice has been made, forfeit the shares by a resolution of the Board to that effect.


Any increase in voting right of a stakeholder due to unpaid dues of another shareholder should be considered passive in nature. This is because there is no effective increase in voting rights as voting rights on partly paid-up shares are considered to be in proportion to the actual amount paid for these shares and, under current rules, no individual can exercise any voting right in respect of any share on which any call or other sums are yet to be paid.

Any increase in voting rights on the expiry of call notice period may not be permanent and some shareholders may pay up the calls even after the expiry of call notice period. The shares are forfeited only after giving prior notice to the member on his failure to pay on the day specified for payment. The member can pay the call amount within the time period specified in the notice. The increase in voting rights becomes permanent only on forfeiture of shares but the same has also been exempted under the amendment.

Also, Increase in voting rights arising out of actions undertaken by the companies under the Companies Act, 2013 such as rights issues, buybacks and schemes of arrangement are exempt from the open offer obligations under regulation 10 of the SAST regulations. The aforementioned situations have the same impact on voting rights as in case of forfeiture as there is no positive act on the part of the acquirer with a view to gain control over the voting rights. The percentage increase in their voting rights was not by reason of any act of theirs but was incidental to the forfeiture of shares of other shareholders by the company.

Consequently, the increase in voting rights may not always be within the knowledge or control of the existing members and may lead to increased liability and resultant confusion. Therefore it is imperative that they be subjected to the same treatment and be exempted from making an Open offer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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