- Equity shares are the fundamental and basic source of financing activities of the business.
- Equity shares are also known as ordinary shares.
- Indian Companies Act 1956 defines equity shares as those shares which do not preference shares.
- The equity shares do not enjoy a preference in getting dividends.
Features of equity shares:
(i) Permanent Capital:
- Equity shares are irredeemable shares. It is permanent capital.
- The amount received from equity shares is not refunded by the company during its lifetime.
- Equity shares become redeemable/refundable only in the event of the winding-up of the company or the company decides to buy back shares.
- Equity shareholders provide long-term and permanent capital to the company.
(ii) Fluctuating dividend:
- Equity shares do not have a fixed rate of dividend.
- The rate of dividend depends upon the amount of profit earned by the company.
- If a company earns more profit, the dividend is paid at a higher rate.
- If there is insufficient profit, the Board of Directors may postpone the payment of dividends.
- The shareholders cannot compel them to declare and pay the dividend.
- The dividend is thus, always uncertain and fluctuating.
- The income of equity shares is uncertain and irregular.
(iii) Rights:
- Equity shareholders enjoy certain rights.
- Right to share in profit when distributed as dividend.
- Right to vote by which they elect Directors, amend Memorandum, Articles, etc.
- Right to inspect books of account of their company.
- Right to transfer shares.
- Participation in management.
- Enjoy Right Issue and Bonus Issue.
(iv) No preferential right:
- Equity shareholders do not enjoy preferential rights in respect to the payment of dividends.
- They are paid dividends only after the dividend is paid to preference shareholders.
- At the time of winding up, they are the last claimants. They are paid last after all the other claims are settled.
(v) Controlling power:
- The control of a company vests in the hands of equity shareholders.
- They are often described as real masters of the company as they enjoy exclusive voting rights.
- Equity shareholders may exercise their voting right by proxies, without attending the meeting in person.
- The Act provides the right to cast vote in proportion to the number of shareholdings.
- They participate in the management of the company.
- They elect their representatives called the Board of Directors for management of the company.
(vi) Risk:
- Equity shareholders bear maximum risk in the company.
- They are described as ‘shock absorbers when the company is in a financial crisis.
- The rate of dividend falls if the income of the company falls.
- The market value of shares goes down resulting in capital loss.
(vii) Residual claimants:
- A residual claim means the last claim on the earnings of the company.
- Equity shareholders are owners and they are residual claimants to all earnings after expenses, taxes, dividends, interests are paid.
- Even though equity shareholders are the last claimants, they have the advantage of receiving the entire earnings that are leftover.
(viii) No charge on assets:
- The equity share does not create any charge over the assets of the company.
- There is no security/guarantee of capital invested being returned.
(ix) Bonus issue:
- Bonus shares are issued as gifts to equity shareholders.
- They are issued ‘free of cost’.
- These shares are issued out of accumulated profits.
- These shares are issued to existing equity shareholders in a certain ratio or proportion of their existing shareholdings.
- Capital investment of equity shareholders grows on its own.
- This facility is available only to equity shareholders.
(x) Rights issue:
- Equity shareholders get the benefit of rights issues.
- When a company raises further capital by issue of shares, the existing shareholders are given priority to get newly offered shares, known as a rights issue.
(xi) Face value:
- The face value of equity share is very less.
- It can be ₹ 10 per share or even ₹ 1/- per share
(xii) Market value:
- Market value fluctuates, according to the demand and supply of shares.
- The demand and supply of equity shares depend on profits earned and dividends declared.
- When a company earns huge profits, the market value of shares increases.
- When it incurs a loss, the market value of shares decreases.
- There are frequent fluctuations in the market value of shares in comparison to other securities.
- Equity shares are more appealing to speculators.
(xiii) Capital Appreciation:
- Share capital appreciation takes place when the market value of share increases in the share market.
- The profitability and prosperity of a company enhance the reputation of the company in the share market and thus, facilitates appreciation of the market value of equity shares.