Top 12 Features of Equity Shares – Scholarszilla
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Features of Equity Shares
What are Equity Shares?
Equity shares are also known as ordinary shares. Companies Act defines equity shares as ‘those shares which are not preference shares’.
The above definition reveals that :
a) The equity shares do not enjoy preference for dividend.
b) The equity shares do not have priority for repayment of capital at the time of winding up of the company.
Equity shares are fundamental source of financing business activities. Equity shareholders own the company and bear ultimate risk associated with the ownership. After paying claims of all other investors the remaining funds belong to equity shareholders.
Types of Equity Shares
The equity share can be of two types :
a) Equity shares with normal voting rights: Voting right of such equity holders is in proportion to his shareholdings.
b) Equity shares with differential voting rights: Such equity holders shall have varying rights regarding dividend, voting or otherwise in accordance with Rule 4 of Companies (Share Capital and Debentures) Rules 2014. Thus company can issue shares with limited voting rights or no voting rights. They may be entitled to an extra rate of dividend, if any.
Features of Equity Shares
1) Permanent Capital: Equity shares are irredeemable shares. The amount received from equity shares is not refundable b the company during its lifetime. Equity shares become refundable only in the event of the winding up of the company or company decides to buy back shares.
2) 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 the company earns more profit, the dividend is paid at a higher rate. On the other hand, if there is insufficient profit or loss, the Board of Directors may postpone the payment of dividends. The equity shares get dividends at fluctuating rates.
3) Rights: Equity Shareholders enjoy certain rights :
a) Right to vote: It is the basic right of equity shareholders through which the elect directors, alter Memorandum and Articles of Association, etc.
b) Right to share in profit: It is an important right of equity shareholders. They have right to share in profit when distributed as dividends.
c) Right to inspect books: Equity shareholders have right to inspect statutory books of their company.
d) Right to transfer shares: The equity shareholders enjoy the right to transfer shares as per the procedure laid down in the Articles of Association.
4) No preferential right: Equity shareholders do not enjoy preferential rights in respect of payment of dividend. They are paid dividend only after dividend on preference shares has been paid.
Similarly, at the time of winding up of the company, the equity shareholders are paid last. Further, if no surplus amount is available, equity shareholders will not get anything.
5) Controlling power: The control of the company is vested with the equity shareholders. They are often described as ‘real masters’ of the company. It is because they enjoy exclusive voting rights. The Act provides the right to cast vote in proportion to shareholding. They can exercise their voting right by proxies, without even attending meetings in person.
6) Risk: Equity shareholders bear maximum risk in the company. They are described as ‘shock absorbers’ when company has a financial crisis. If the income of company falls, the rate of dividend also comes down.
7) Residual claimant: Equity shareholders as owners are residual claimants to all earnings after expenses, taxes, etc. are paid. A residual claim means the last claim on the earnings of the company. Although equity shareholders come last, they have the advantage of receiving entire earnings that are leftover.
8) No charge on assets: The equity shares do not create any charge over assets of the company.
9) Bonus Issue: Bonus shares are issued as gifts to equity shareholders. These shares are issued free of cost to existing equity shareholders. These are issued out of accumulated profits. Bonus shares are issued in proportion to the shares held.
10) Right Issue: When a company needs more funds for expansion purpose and raises further capital b issue of shares, the existing equity shareholders may be given priority to get newly offered shares. This is called ‘Right Issue’. The shares are offered to equity shareholders first, in proportion to their existing shareholding.
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 depend on profits earned and dividend declared. When a company earns huge profit, market value of its shares increases. On the other hand, when it incurs loss, the market value of its shares decreases.
