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Equity Shares

Issue of shares or ownership securities is the most important method of raining long-term finance for permanent investment in the company. Funds raised form the issue of shares provide permanent capital to the company. A share may be defined as a unit of measure of a shareholder’s interest in the company. The share capital of a company is divided into a large number of equal parts and each part is individually known as a share. According to the Companies Act, 1956, a public company can issue tow types of ownership securities, viz. (1) equity shares, and (2) preference shares.

Equity shareholders provide capital on permanent basis to the company. Equity shareholders are the real owners of the company and they bear the risk of business. They get dividend only after the dividend on preference capital can be paid back only after every claim including that of preference shareholders has been settled. Since equity shareholder bear higher risk, they also stand a chance of getting higher dividend if the company’s earnings are higher.

Equity shareholders control of the affairs of the company as they have the voting right in the general meetings of the shareholders of the company. The elect the board of directors of the company and frame policies of the company in the general meetings of the shareholders.

Features of Equity Shares. The main features of equity shares  are discussed below:

(i)    The equity shareholders are the primary risk bearers as they provide risk capital. No security of fixed assets is required to raise such capital.

(ii)    The equity share capital is not redeemable during the life time of the company.

(iii)    There is uncertainly of returns as the rate of equity dividend is not fixed. It may vary form year to year depending upon the profits available after payment on interests on loans and dividends on preference shares and the decision of the company at its annual general meeting.

(iv)    Equity share capital is the basis on which loans can be raised in the market. It is a source of confidence to the loan providers.

(v)    The equity shareholders enjoy voting rights. hey have right to elect directors who will manage the company.

Merits of Equity Shares.
Equity shares are regarded as the cornerstone of financial structure of a company as they offer the following advantages:

(i)    Equity share capital constitutes the permanent resources of the company. They company is not bothered of the problem of refunding the capital raised by issuing equity shares.

(ii)    Equity shares do not impose any obligation on the company to pay a fixed rate of dividend to their holders.

(iii)    A company with sufficient paid-up equity capital is viewed with considerable favor by the lenders. The company can raise loans form the market.

(iv)    Equity shares do not create any charge over the assets of the company. The assets may be utilized as security for further financing.

(v)    Equity shareholders enjoy voting rights at the shareholders’ meetings. They can elect directors to manage the affairs of the company. This ensures democratic management of the company.

Demerits of Equity Shares.
Equity shares capital has certain drawbacks also. These include the following:

(i)    Equity shareholders have the risk of no returns or fluctuating returns because of which conservative investors do not prefer equity shares.

(ii)    Excessive issue of equity shares may lead to over-capitalization.

(iii)    If the company issues only equity shares, it will lose the opportunity of trading on equity by issuing other securities.

(iv)    Higher dividends on equity shares during prosperous periods push up their market value and generally leaned to awkward speculation.

(v)    The affairs of the company can be manipulated by the powerful group of equity shareholders.

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