Question

State the features of equity shares.

Answer the following question.

Explain the features of equity shares.

Answer 1

Features of Equity shares are as follows:

1. Permanent capital: Equity shares are irredeemable shares. The amount received from Equity Shares is not refundable by the company during the lifetime. Equity shares become redeemable only in the event of winding up of the company. Equity shareholders provide long term and permanent capital to the company.
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, the Board of Directors may postpone the payment of dividends. The shareholders can not compel them to declare and pay the dividend. The income of equity shares is irregular and uncertain. They get dividends which are always fluctuating.
3. No preferential right: Equity shareholders do not enjoy preferential rights with respect to the payment of dividends. It means equity shareholders are paid dividends only after the dividend on preference shares has been paid. At the time of winding up of the company also, the equity shareholders are paid in the last. They are the last claimants. If no surplus amount is available after paying debts and preference shares, equity shareholders will not get anything. Thus, equity shareholders stand second in case of getting dividends on their shares as well as getting back their capital at the time of liquidation of the company.
4. Rights: Equity shareholders enjoy certain rights. These include -
   a. The right to share in profit, when distributed as a dividend, is the most important right of equity shareholders. If the company is successful and makes a handsome profit, they have the advantage of a large dividend.
   b. The right to vote is the basic right of equity shareholders by which they elect directors, amend Memorandum, Articles, etc.
   c. Right to inspect books of account of their company of which they are owners.
   d. The right to transfer shares is one of the most important rights of the shareholder.
5. Control: The control of the company is vested in equity shareholders. They are often described as real masters of the company. It is because they enjoy the exclusive voting rights. The voting rights of equity shareholders are protected as far as possible. Equity shareholders may exercise their voting rights by proxies, without attending a meeting in person. The Act provides the right to cast vote in proportion to the number of shareholdings.
   Equity shareholders participate in the management of the company. They elect their representatives called Directors on the Board for the management of the company.
6. Risk: Equity shareholders bear maximum risk in the company. They are described as ‘shock absorbers’ when a company has a financial crisis. If the income of the company falls, the rate of dividends also comes down. Due to this, the market value of equity shares goes down resulting in capital loss. Thus, equity shareholders are the main risk-takers.
7. Residual claimants: Equity shareholders are owners and they are residual claimants to all earning after expenses, taxes, etc. have been paid. Although equity shareholders are the last claimants they have the advantage of receiving entire earnings that are leftover.
8. Face value: The face value of equity shares is low, in comparison to preference shares. It is generally Rs.10/- per share or even Rs.1/- per share.
9. Market Value: There is more fluctuation in the market value of equity shares in comparison to other securities. Therefore, equity shares are more appealing to the speculators.
10. Bonus Issue: Bonus shares are issued as a gift 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. Thus capital investment of (ordinary) equity shareholder tends to grow on its own. This benefit is available only to the equity shareholder.