Equity Shares Meaning
Equity shares are instruments to raise equity capital. The equity share capital is the backbone of any company’s financial structure. Equity capital represents ownership capital. Equity shareholders collectively own the company. They enjoy the reward of ownership and bear the risk of ownership. The equity share capital is also termed as the venture capital on account of the risk involved in it. The equity shareholders’ liability, unlike the liability of the owner in a proprietary concern and the partners in a partnership concern, is limited to their capital contribution.
According to Sec. 43 (a) of the Companies Act 2013 “an equity share is share which is not preference share”. An equity share does not carry any preferential right. Equity shares are entitled to dividend and repayment of capital after the claims of preference shares are satisfied. Equity shareholders control the affairs of the company and have right to all the profits after the preference dividend has been paid.
Now a days equity capital is raised through global equity issues. Global depository receipts (GDRs), American depository receipts (ADRs), etc. are certain instruments used by Indian companies to overseas capital market to get equity capital.
Equity Shares Features
1. Owned capital: Equity shareholders are the owners of company and amount invested by them is owned capital.
2. Fixed nominal value: Every share has fixed nominal value which is called face value of shares. Face value of shares may be Rs. 1, Rs. 2 , Rs. 5 , Rs. 10, Rs. 100 etc.
3. Distinctive number: Each equity shares are distinctly numbered so that they can be easily identified.
4. Rights of shareholders: A share gives its owner the right to receive dividend, the right to vote, the right to attend meetings, the right to inspect the books of accounts.
5. Dividend: Every shareholder is entitled to a return on shares which is known as dividend. Dividend depends on the profits made by a company. Higher the profits, higher will be the dividend and vice versa.
6. Transferability: Equity shares are freely transferable. Listed equity shares can be easily sold in stock exchange.
7. Right issue: When a company makes additional issue of equity shares, the existing equity shareholders are given rights to acquire the new shares from company directly at discounted price. Shareholders can either accept the right shares or can renounce the right to some other parties.
8. Bonus shares: If a company has huge reserves and surplus, than it can capitalize its reserve by issuing bonus shares to their existing equity shareholders out of the accumulated profits. These shares are issued free of cost in proportion to the number of existing equity share holding.
9. Irredeemable: Equity shares are always irredeemable. This means equity capital is not returnable during the life time of a company. But company can buy back its shares to redeem the amount of equity share capital.
10. Capital appreciation: The nominal or par value of equity shares is fixed but the market value fluctuates. The market value mainly depends upon profitability and prosperity of the company. High rate of dividend is paid with high rate of profit, the shareholders capital is appreciated through an appreciation in the market value of shares.
Equity Shares Advantages and Disadvantages
Equity Shares Advantages
1. Owners’ Capital: Equity shares are instruments to raise equity capital. The equity share capital is the backbone of any company’s financial structure. Equity capital represents ownership capital. It is the ‘heart’ to the business.
2. Permanent source of Capital: Equity shares are the permanent source of capital for a company. There is no problem of refunding the capital. It is repayable only in the event of winding up of a company and that too only after all the obligations of preference shareholders have been met in full.
3. No fixed payment obligation: Dividend on equity shares is not fixed. Payment of dividend to equity shareholders depends on the availability of profit and the discretion of the Board of Directors.
4. No charge on the assets of the company: Equity shares do not create any charge on the assets of the company and the assets may be used as security for further financing.
5. Risk-bearing capital: Equity capital is the risk-bearing capital, unlike debt capital which is risk-burdening. In case of huge loss or insolvency of a company, it is the equity shareholders who have born all the losses.
6. Creditworthiness: Equity share capital strengthens the credit worthiness of a company and increases the ability of the company to secure debt capital. Debt can be easily raised by pledging equity shares to any financing institutions.
7. Global reach: Equity capital market is now expanding and the global capital market can be accessed. Company can raise funds globally by issuing ADRs and GDRs.
8. Capital appreciation: The nominal or par value of equity shares is fixed but the market value fluctuates. The market value mainly depends upon profitability and prosperity of the company. High rate of dividend is paid with high rate of profit, the shareholders capital is appreciated through an appreciation in the market value of shares.
Equity Shares Disadvantages
1. High cost of Equity Capital: Cost of issue of equity shares is very high. Underwriting commission, brokerage costs and other issue expense are high for equity capital thereby raising up issue cost and also to retain equity investors company has to pay high rate of dividend.
2. Dilution of control: Equity shareholders are owners of the company. Issue of equity shares will lead to dilution of control. Shareholders holding more than 50 percent shares can control the whole affairs of the company.
3. Excessive reliance on financing through equity shares reduces the capacity of the company to trade on equity. The excessive use of equity shares is likely to result in over capitalization of the company.
4. No trading on equity: Excessive reliance on financing through equity shares reduces the capacity of the company to trade on equity. The excessive use of equity shares is likely to result in over capitalization of the company.
5. Not suitable for conservative investors: Equity shares are suitable for risk-takers only. It is a high risk – high return investment alternative. It is not suitable for those who want to invest in safe securities with fixed income.
6. High cost of serving: The cost of servicing equity capital is generally higher than the companies issuing preference shares or debenture. The expectation of dividend of the equity shareholders is very high as compared preference shares or debentures.
7. Irredeemable: Equity shares are always irredeemable. This means equity capital is not returnable during the life time of a company. Company can buy back its shares to redeem the amount of equity share capital but it is possible only when company has huge cash reserve.
8. Manipulation in shares prices: In stock market, share prices of small companies can be easily manipulated to trap small investors.