Equity Shares Capital represents the investment made by the owners of the business. They enjoy the rewards and bear the risks of ownership of the business. Equity Shareholders are paid dividends only after paying the dividend to preference shareholders and after meeting the future investment needs of the organization.
An equity share, also known as ordinary share represents ownership in a company, where each holder is a fractional owner and undertakes the maximum liability regarding the business.
- Equity shares are issued to the public for long term financing.
- They are irredeemable in nature.
- Equity shareholders are the owners of the company.
- They have control over the management and they receive a dividend if the company is making profits.
Features of Equity Shares
- No Maturity Period – Equity shares are irredeemable in nature, which means they have no maturity period. They cannot be redeemed during the lifetime of the business.
- Right to Control – Since equity shareholders are the real owner of the company they have control over management and have a right to make decisions regarding business operations.
- Voting Rights – Equity shareholders have voting rights in the meeting of the company, with the help of voting rights they can influence business decisions.
- Transferable – Equity shares are transferable in nature they can be transferred from one person to another person with or without consideration.
- Claim on Assets – In case of winding up of a company, equity shareholders have the right to claim on assets. This right is only available to equity shareholders.
- Claim on Income – After paying a fixed rate of dividend to preference shareholders, equity shareholders have the right over company profits.
- Limited liability – Equity shareholders have only limited liability which is the value of shares they have purchased. If the shareholders have fully paid up shares, they have no liability.
Advantages of Equity Shares
- Permanent Source of Finance – Equity shares are a permanent source of finance. It can be used for long term financial needs such as procurement of fixed assets.
- Less Cost of Capital – Equity shares are a very good source of finance for the company as they consist of less cost of capital compared to other sources of finance.
- Voting rights – Equity shareholders have voting rights which means they can change or remove any decision in a meeting. This type of right is only available to equity shareholders.
- No Fixed Dividend – A business does not have any obligation to pay a dividend to equity shareholders. If the company earns profit then equity shareholders are eligible to get dividend otherwise they cannot claim any dividend from the company.
- Liquidity – Equity shares are liquid in nature which means they can be sold easily in the capital market.
Disadvantages of Equity Shares
- Irredeemable – Equity shares cannot be redeemed during the lifetime of the business.
- No Trading on Equity – When the company raises capital through equity, they can’t take advantage of trading on equity.
- An obstacle in Management – Since equity shareholders are the real owner of management they can create obstacles and influence business decisions as they have the power to change any management decision.
- Speculation – Equity shares trading in the share market can lead to speculation during a fortunate period.
Types of Equity Shares
Equity shares are written on the liability side of a balance sheet. They are of following types –
Authorized share capital
Authorized share capital is the maximum amount that a company can raise by issuing the shares and on which the registration fee is paid. This limit is mentioned in their Memorandum cannot be exceeded unless the Memorandum of Association is altered.
Issued share capital
Issued share capital is a part of authorized share capital. This is that part of authorized share capital which the company offers for subscription to investors and includes shares allotted to members for any consideration.
Subscribed share capital
It is a part of issued share capital which has been subscribed or purchased by an investor at a mutually-agreed value and has been legally allotted.
Called-up Capital
It means the total amount of called up capital on the shares issued and subscribed by the shareholders. It refers to the number of shares that were initially sold but were later not required by the company.
Paid-up share capital
Paid-up share capital is a part of called-up capital. It is the amount that the investors have paid to the company.
Right shares
These shares are issued after the original issue of shares to existing shareholders in the proportion of their holdings in the company. Such shares are being offered to the existing equity shareholders on a pro-rata basis. It is issued to protect the ownership of the existing investors.
Bonus shares
Bonus shares are additional shares provided to the existing shareholders without any additional cost, depending upon their holdings in the company. It is a part of the company’s retained earnings which are not given out in the form of dividends but are converted into free shares.
Sweat equity shares
Sweat equity shares are those shares which are issued at a discount to its directors or employees as a mode of payment for their contribution. It may be provided in lieu of some intellectual property, valuable additions, or reward for services.