Equity Shares
A company’s most important source of long-term capital is equity shares. Because equity shares represent a company’s ownership, the capital raised through the issuance of such shares is known as ownership capital or owner’s funds. A company must have equity share capital in order to be established.
Equity shareholders are paid on the basis of the company’s earnings rather than a fixed dividend. They are known as “residual owners” since they receive what remains after all other claims on the company’s income and assets have been satisfied. They gain from the reward while also bearing the risk of ownership. Their liability is limited to the amount of capital they invested in the company.
Features of Equity Shares
1. Primary Risk Bearers: The equity shareholders of a company are its primary risk bearers. It means that if the company faces a loss, then its shareholders will have to bear the loss. Also, before paying the equity shareholders their due payment, it is first given to the company’s creditors.
2. Basis for Loans: A company can raise loans based on its equity share capital. The amount of equity share capital adds up to the credibility of the company and thus increases the confidence of the creditors.
3. Claim over Residual Income: The equity shareholders of a company have a claim over its leftover income only. It means that, after satisfying all the claims of every creditor, outsider, and preference shareholder, if the company is still left with income, the equity shareholders can claim that money.
4. Higher Profit: The rate of interest of debenture holders and the rate of dividend for preference shareholders are fixed; however, there is no fixed rate for equity shareholders. Therefore, in the case of profit, the debenture holders and preference shareholders will get the fixed income only; however, the equity shareholders will enjoy a higher profit.
5. Control: The equity shareholders have control over the activities of a company. They have voting rights and thus can case vote for the selection of the Board of Directors. The Board of Directors are those who control and manage the company’s affairs.
6. Pre-emptive Rights: The provisions of Companies Act gives Pre-emptive rights to the shareholders. This right states that, whenever a company plans to issue new equity shares, first of all, it must offer the shares to its existing shareholders. If they refuse to buy the new shares, then only the company shall offer the shares to the general public. By doing this, the right protects the equity shareholder’s controlling rights.
7. Permanent Capital: The equity shareholders of a company provide it with permanent funds. The company does not commit to return the money or pay dividends at a fixed rate.
Merits and Demerits of Equity Shares: The merits of equity shares include source of fixed capital, no charge on fixed assets, democratic management, etc. and demerits of equity shares include risk of fluctuating returns, legal formalities, etc.