Today we shall learn all about Equity Shares. The capital of a company is divided into small units which are called shares. For example, a company decides to raise ₹1 crore of capital from the public by issuing shares. It can divide its capital into units of ₹10 or ₹100 each. These individual units are called shares.
A share is a unit of ownership in the company. Anyone who owns shares in a company limited by shares is called a Shareholder or a Member. A shareholder can hold one or many shares in the company. It entitles the holder to an equal claim on the company’s profits and also an equal obligation for the company’s debts and losses. Each share represents a vote in the company concerned.
There are 2 main types of shares. These are equity shares and preference shares.
Equity shares are also called ordinary shares or common shares. The holders of equity shares are the real owners of the company. They have voting rights in the meetings of the company. They are entitled to receive dividends as declared by the company. They have a residual claim over assets in case of liquidation of the company.
Equity shares can further be classified into various categories and appear in the balance sheet of a company as follows :
Authorized share capital
This is the maximum amount of capital which the company is authorized to raise and issue, as stated by its Memorandum of Association.
Issued Share Capital
This is that part of the Authorized capital which is offered to investors by the company. Usually only a part of the authorized share capital is issued. As and when future funds need arises, the company issues further capital from the authorized capital.
Subscribed Share Capital
This is that part of the issued capital which the public subscribes to. The issue can be over subscribed, fully subscribed, or under subscribed.
Oversubscribed issue is when the subscribed share capital exceeds the issued share capital. In this case, since the company cannot give full allotment to the public, they allot the shares on a pro rata basis.
Fully subscribed issue is when the subscribed share capital equals the issued share capital. In this case, all shares are allotted to the public in full.
Under subscribed issue is when the subscribed share capital is less than the issued share capital. In this case, all shares are allotted to the public in full and the differential is met by the underwriters.
This is that part of the subscribed capital, the amount of which is paid in full by the investor. Paid-up capital is the amount of money which is actually invested in the business.
Normally, the issued, subscribed, and paid-up capital becomes one and the same for the company.
Equity shares are further divided into 2 main types as below –
These are shares issued to the existing shareholders of a company. The shareholders have the first right to purchase new shares at a discounted rate in the case of a rights issue. This protects the ownership rights of the existing shareholders.
These are the type of shares given by the company to their shareholders as a dividend. The company generally pays out shares when it is low on cash.
The value of equity shares is expressed in terms of –
Par or Face Value
It is the nominal value of a share as it is accounted in the books of accounts.
This is the price at which the equity share is actually offered to the investor. Normally, the issue price and the face value is the same in case of new companies.
When a share is issued at a price higher than the face value, the excess amount is called share premium.
When a share is issued at a price lower than the face value, it is said to be issued at a discount.
This is the balance sheet value of a share. It is the ratio of total paid up capital and reserves and surplus divided by the total number of shares.
This is the price at which the shares are currently being sold in the market. Companies listed on stock exchanges can easily determine their market value.
Merits of Equity Shares- for shareholders
- Shareholders of equity shares are the real owners of the company.
- Value of equity shares increases with an increase in company profits.
- Shares can be easily sold in the stock market ensuring liquidity.
- The liability of the shareholder is limited to the nominal value of the shares.
- Shareholders are conferred voting rights and have a say in the management of the company.
Demerits of Equity Shares- for Shareholders
- No assured returns- The shareholder gets a dividend only when a company has sufficient profits and the board of directors decide to declare a dividend.
- Highly speculative- High speculations happens in equity share trading.
- Risk is high as in case of loss, shareholders do not get dividend. Also, in case of winding up, they are the last to get a refund on the money invested by them.
Merits of Equity Shares- for Management
- The company can raise capital by issuing equity shares without creating any charge on its fixed assets.
- The capital raised by issuing equity shares is not required to be paid back during the lifetime of the company. It has to be paid back only when the company winds up.
- There is no binding on the company to pay dividend. Dividend may be declared only if there is enough profits.
Demerits of Equity shares- for Management
- It is a time consuming process and there may be procedural delays while issuing equity shares.
- The cost of raising capital through equity share issue is more as compared to debt.
- There is always the risk of dilution of control. Shareholders can form groups and grab control of the company.
Equity shares form the crux of the stock market. In my next post, we will learn about preference shares and their features and characteristics. Comment below and let me know what other topics you’d like me to cover in future!