Equity Shares

Definition: Equity Shares can be defined as ordinary shares which represent fractional ownership of the holder in the business venture. It brings long-term capital to the company which is to be repaid only at the time of winding up of the company.

The capital raised by issuing equity shares is known as equity share capital also known as owners fund, which is the primary as well as a permanent source of finance to the company. The holder of such share is known as Equity Shareholders who are the real owners of the company.

Characteristics of Equity Shares

1. Equity Shareholders possess voting rights at the all General Meeting (GM) of the company, and so they can control the management of the company by appointing auditors and directors of their choice.
2. The holders of equity shares are entitled to share the company’s profit as dividend and bonus shares. However, the holders cannot demand a dividend declaration by the firm.
3. The Board of Directors (BOD) decides the rate of dividend to the Equity Shareholders, which is based on the dividend policy of the firm and surplus profits after paying off dividend to the preference shareholders.Hence, the rate of dividend to the equity shareholders may differ every year. Further, if in a certain year, a company incurs a loss, then the dividend is neither paid to the equity shareholders that year, nor it is carried forward to the next accounting year.
4. On the event of winding up of the company, the repayment of capital to equity shareholders is made after refunding the claims of all the other interested parties, i.e. creditors, debenture holders and preference shareholders.
5. The liability of the equity shareholders is limited to the nominal value of shares issued to them.

According to Shareholders viewpoint, investing in equity shares is best for those investors who want to take the risk of getting higher returns. Further, the liabilities of the shareholders is confined to the face value of shares.

Differential Rights

As per the Companies Act, 2013 publicly listed companies can also issue equity shares with differential rights if the articles of association authorize such issue. These include the right to:

• Vote on all the resolution, presented before the company.
• Subscribe to shares during the further capital issue, by the company.
• Appoint proxy, on his/her behalf to attend and vote at the AGM.
• Receive a xerox of Company annual financial account.
• Get the notice of AGM.
• Inspect various statutory registers kept by the company.
• Request Extraordinary General Metting (EGM).

The authorized equity capital having differential rights concerning dividend, voting and so forth, must comply with the rules prescribed by the Government.

Issue of Equity Shares

1. For cash: As the name suggests, the company issues equity shares to the subscribers to raise money from the general public, so as to spend the funds in running, growing and expanding the business.
2. For consideration other than cash: The equity shares can also be issued in kind called as consideration other than cash, i.e. in direct exchange for assets like building, land, vehicle, etc. or to promoters, lawyers or others for the services rendered by them at the time of formation of the company. Such shares appear specifically under the head ‘share capital’.

One of the advantages of equity shares to the company is that it does not guarantee any mandatory payment to the shareholders. Hence there is no binding on the company to pay the equity dividend.