This article has been written by Ms.Taranjot Kaur, a 1st year law student of Panjab University,Chandigarh.
Introduction –
Equity share capital means the capital raised by a company by issuing the shares to the general public. Equity share capital is also known as risk capital.To meet the fund requirements, the companies make an offer to the public to be a part of the company by subscribing to its share. The investors give money and purchase the shares of the company. So, the capital which is raised by issuing all the shares is known as equity share capital.Once the equity shares are issued to the public through IPO (Initial Public Offer), they become a regular source of funds for the company. Moreover, they are not redeemed and paid off until the liquidation of the company.At the same time, the equity shareholders enjoy the benefits of the shares. They become the owners of the company and receive a dividend on the number of shares they purchase.At the time of liquidation as well, they have a right to get shares in the remaining assets.The main objective of issuing equity shares is to raise the funds for growth and expansion. The company issues the equity shares to the public through IPO( initial public offer). When the shares get listed on the stock exchanges, you can easily buy and sell them anytime you want.
What is a ‘share’ as per Companies Act, 2013?
The capital of the company seldom comprises of a ‘single unit’, in fact, it comprises of numerous indivisible units. These units are of a specific amount. Therefore, when a person purchases such a unit or several units, he purchases a certain defined percentage of the share capital of the company. In this case, he becomes one of the many shareholders of that company. The Companies Act defines it as ‘a share is share in the Share Capital of the company’.
Features of Share Capital –
Permanent Nature – The equity shares which are issued by the company are permanent and are non-redeemable. You can’t give back these shares until and unless the company makes up its mind to wind up its business.
Dividend Pay-Out and Transferable – Equity shares are transferable, which means, you can easily transfer the ownership of these shares to some other investor. In addition to this, the equity shareholders receive a dividend on the shares. The amount of the dividend depends upon the profit made by the company in that particular year and on the availability of funds. So, whenever a company incurs losses, it doesn’t pay the dividend that year.
High Return Potential – Equity shares are a risky investment and they are volatile but the risk is worth taking because the returns a shareholder gets on these shares are huge.
Types of Equity Share –
Authorized Share Capital- This amount is the highest amount an organization can issue. This amount can be changed time as per the companies recommendation and with the help of few formalities.
Issued Share Capital- This is the approved capital which an organization gives to the investors.
Subscribed Share Capital- This is a portion of the issued capital which an investor accepts and agrees upon.
Paid Up Capital- This is a section of the subscribed capital, that the investors give. Paid-up capital is the money that an organization really invests in the company’s operation.
Right Share- These are those type of share that an organization issue to their existing stockholders. This type of share is issued by the company to preserve the proprietary rights of old investors.
Bonus Share- When a business split the stock to its stockholders in the dividend form, we call it a bonus share.
Sweat Equity Share- According to section 54 of the Companies Act, a company can issue sweat equity shares. These equity shares are issued by a company to its own employees or directors. Such shares are generally issued at a discount. Such shares might also be issued for consideration other than cash like for rendering know how or making some Intellectual Property Rights available for the company, etc. All limitations, restrictions and other provisions that are applicable to equity shares are also applicable to sweat equity shares. Sweat equity shareholders rank pari passu with regular equity shareholders.
Benefits of Equity Share Capital –
Offers Creditworthiness – When you own the equity shares of a company as an investor, the shares act as collateral as well. So, whenever you need a loan to fulfil your needs, you can keep them as collateral. The equity shares show the creditworthiness of a company, making the approval of your loan very convenient.
Highly Liquid- Liquidity is a very significant factor that must be considered before investing in any financial instruments. It means, how easily you can convert your investment into cash.The equity shares are the most liquid assets and you can sell them easily in the market whenever the need arises.In case of any emergency, you can easily liquidate your investment.
Stock Split- Moving on to another advantage of equity shares, which is the stock split. It means, splitting the equity shares into smaller parts and decreasing their price. This leads to the benefit of investors.The decrease in the price of shares makes the shares more liquid and the large volume leads to a rise in the price if the company is performing well. This way, the stock split benefits the investors.
High Income – Equity shares capital offers high income to the investors. You can easily generate high income by investing in the equity shares of a company. Not only do you earn a high income but also you earn a steady dividend as well.
Demerits of Equity Share Capital –
The enterprise cannot take either the credit or an advantage if trading on equity when only equity shares are issued.
There is a risk, or a liability overcapitalization as equity capital cannot be reclaimed.
The management can face hindrances by the equity shareholders by guidance and systematizing themselves.
When the firm earns more profits, then, higher dividends have to be paid which leads to raising in the value of the shares in the marketplace and its edges to speculation as well.
Conclusion –
An equity share, normally known as ordinary share is a part ownership where each member is a fractional owner and initiates the maximum entrepreneurial liability related to a trading concern. These types of shareholders in any organization possess the right to vote.Equity share and Preference share are the two types of share that a company issues. Equity share is an ordinary share. Preference share experience the perquisites of the dividend distribution first. The equity stockholders get the opportunity to cast their vote in major business decisions.The company preference share receives the dividend at a fixed rate.Whenever there is an issue with the company, the preference share gets the right to return of the capital before the equity share.
References –
https://www.indmoney.com/articles/stocks/equity-share-capital
https://byjus.com/commerce/what-are-equity-shares/
https://www.investopedia.com/terms/s/sharecapital.asp
https://lawcorner.in/types-of-shares-and-share-capital-under-companies-act-2013/
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