What are equity shares?
Equity shares are also known as ordinary shares. The Companies Act defines equity shares as ‘shares which are not preference shares’.
From the above definition it can be seen that :
a) Equity shares do not get preference for dividend.
b) Equity shares do not have priority for repayment of capital at the time of winding up of the company.
Equity shares are the basic source of financing business activities. Equity shareholders own the company and bear the ultimate risk associated with ownership. After paying the claims of all other investors, the remaining funds belong to the equity shareholders.
Types of Equity Shares
Equity shares can be of two types:
a) Equity shares with normal voting rights: Such equity holders have voting rights in proportion to their shareholding.
b) Equity Shares with Differential Voting Rights: Such equity holders shall have differential rights as per Rule 4 of the Companies (Share Capital and Debentures) Rules 2014 as to dividend, voting or otherwise. Thus a company can issue shares with limited voting rights or without voting rights. Right they can get additional rate of dividend, if any.
Features of Equity Shares
1) Permanent capital: Equity shares are non-convertible shares. The proceeds from equity shares cannot be returned to the company during its lifetime. Equity shares are refundable only when the company is wound up or the company decides to buy back the shares.
2) Fluctuating Dividend: Equity shares do not have a fixed rate of dividend. The rate of dividend depends on the amount of profit earned by the company. If the company is making more profit, the dividend is paid at a higher rate. On the other hand, if there is not enough profit or loss, the board of directors can postpone the payment of dividend. Equity shares receive dividends at fluctuating rates.
3) Rights: Equity shareholders get certain rights:
a) Right to vote: This is the basic right of equity shareholders to change the elected directors, memorandum and articles of association etc.
b) Right to share in profits: This is an important right of equity. Shareholders are entitled to share in the profits when they are distributed as dividends.
c) Right to Inspect Books: Equity shareholders have the right to inspect the statutory books of their company.
d) Right to Transfer Shares: Equity shareholders have the right to transfer shares as per the procedure laid down in the Articles of Association.
4) No Preferential Rights: Equity shareholders do not get preferential rights in respect of payment of dividend. Dividends are paid only after preference shares are paid.
Similarly, at the time of winding up of the company, equity shareholders are paid last. Further, if no additional funds are available, the equity shareholders will receive nothing.
5) Power of Control: The control of the company lies with the equity shareholders. He is often described as the ‘real master’ of the company. Because they have special right to vote. The Act provides voting rights in proportion to shareholding. They can exercise their right to vote by proxy, without visiting them in person.
6) Risk: Equity shareholders bear maximum risk in the company. They are described as ‘shock absorbers’ when a company faces financial crises. If the company’s income decreases, the dividend rate also decreases.
7) Residual claimants: Equity shareholders as owners are residual claimants of all earnings after payment of expenses, taxes etc. A residual claim is the last claim on the company’s earnings. Although equity shareholders come in last, they have the advantage of receiving the entire remaining earnings.
8) No Charge on Assets: Equity shares do not charge any charge on the assets of the company.
9) Bonus Issue: Bonus shares are issued as a gift to equity shareholders. These shares are given free to the existing shareholders. These are issued from retained earnings. Bonus shares are issued in proportion to the shares held.
10) Right Point: When a company needs more funds for expansion purposes and raises further share capital, the existing equity shareholders can be given priority to get the newly offered shares. This is called ‘right issue’. Equity shareholders are first offered shares in proportion to their existing shareholders.
11) Face value: The face value of equity shares is low. It can be generally 10 per share or even 1 per share.
12) Market Value: The market value of equity shares fluctuates according to the demand and supply of these shares. The demand and supply of equity shares depends on the profits earned and dividends declared. When a company earns huge profits, the market value of its shares increases. On the other hand, when it incurs losses, the market value of its shares decreases.