Every business needs funds to survive and run because without it, there is no business. Every activity in business involves funds, like sales, purchases, salaries, rent, wages, electricity, etc., so funds are an essential element in business. There are various sources of obtaining funds, and it depends on the type and nature of the business; each source has its own characteristics.
There are many sources of raising funds in a company, such as shares, debentures, loans, etc. Among these, shares are the most preferred source of raising funds, and equity shares are preferred among shares because there is no payment required till the closure of the company, nor any interest has to be paid, but dividend payment is applicable. Note: The company maintains a debt-equity ratio due to its financial position, which means that the company uses other sources along with shares to raise funds.
Issuance of equity shares is available only in a company and is governed by law, and its membership is affected by the type of company, as the type of company describes the minimum and maximum members who are entitled to subscribe equity shares of the company. If the company is listed on the stock exchange, then the trading of shares is governed by the stock exchange board of the country.
Table of Contents
What is an Equity Share?
Equity share is an instrument used to raise capital from investors, and it is a type of share and is also known as a common share or ordinary share. It represents ownership in the company, and the one who holds it is called a shareholder, and the shareholder has ownership in the company as much as the number of shares he hold. In simple words, equity shares are a portion of the ownership of the company, and each equity share has equal ownership.
Equity share is transferable, which means the shareholder is eligible to transfer his equity share to another’s name, but legal compliances need to be met, and it is perpetual in nature, which means the transfer of equity share does not affect the existence of the equity share. The transferability of the share depends on the type of company, as the type of company affects the transferability of the share.
Equity share provides meeting rights and voting rights to their members, and the amount of meeting and voting rights a member will be given depends on the number of shares they hold, i.e., the more shares, the more rights, and the fewer shares, the fewer rights. In simple terms, each share has certain ownership rights, and these determine the rights of the shareholder.
Equity share represents real ownership in the company, as they provide various rights to the shareholders, and these are unsecured as compared to preference shares, as these have no backup, and equity shareholders are entitled to payment only if there is fund left after other payments. Equity shareholders are entitled to a dividend if the company has sufficient funds to pay a dividend, but the objective, situation, etc. of the company affect the payment of a dividend, and the amount of dividend is not fixed as it keeps on changing accordingly.
Features of Equity Share
Following are the features of equity share:
1. Instrument:
Equity share is an instrument (means) of raising capital from investors, and it is available only in a company, as only those businesses are entitled to raise capital by issuing equity shares that are registered as a company under the Companies Act or equivalent legislation. Each share has its own unique number and other formalities that make it authentic, and it is governed by internal and external law.
2. Portion:
Equity share is a portion (part) of the ownership or authorized capital of the business, and each equity share has a unique identity, and all have the same value. For example, if the authorized capital is Rs 1 crore and it is divided into 1 lakh shares, then in this scenario, there are 1 lakh shares, which are called part of the authorized capital, and the value of each share is Rs 100. Dividing the authorized capital into multiple shares helps in attracting more investors, as it increases the investment potential of the investor.
3. Transferable:
Equity share is transferable in nature, which allows shareholders to transfer it to another, but the type of company affects it. For example, in a one person company, transfer of shares is restricted as only one member is allowed to hold the entire share, in a private company, transfer of shares is allowed but with certain restrictions, in a public company, there is no restriction on the transfer of shares.
4. Ownership:
Equity share represents the ownership of the business as the business uses it to transfer ownership to investors in exchange for capital. Without getting anything in return, investors do not invest in the business, for this, the business gives them ownership, and it is equal to the investor’s investment, and the ownership of each share is equal as the value of the share is the same, and whoever holds the maximum shares has the maximum influence in the business.
5. Unsecured:
Equity shares are unsafe from the investor’s point of view because if the business does not have funds, then it is not obliged to pay the equity shareholders. For example, if a company closes down, then the company first starts paying its debts, then if funds are available, it pays the preference shareholders, and then, finally, equity shareholders are paid proportionately if funds are available.
6. Perpetual:
Equity shares are perpetual in nature, i.e., they are not affected by the change of their owner or transfer of ownership. They continue to exist as long as the business exists and cease to exist with the discontinuation of the business. This feature is similar to and linked with the perpetual feature of a company because when members change, the owner of the share also changes, and vice versa.
7. Governed:
Equity share is governed by internal and external laws, such as the business’s Articles of Association (AOA) and Memorandum of Association (MOA), company laws or governing laws, etc. It is a legal instrument and has the ownership of the business, hence it is governed by law. If the share is of a listed company, then it is also governed by the stock exchange board of the country.
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QNA/FAQ
Q1. What is an equity share?
Ans: Equity share is an instrument used to raise capital from investors.
Q2. Can an equity share be transferred?
Ans: Yes, an equity share can be transferred.
Q3. Does equity share unsecured compared to other sources?
Ans: Yes, equity share is unsecured compared to other sources.
Q4. Which share represents the true ownership of the business?
Ans: Equity share represents the actual ownership of the business.
Q5. Write the features of equity share.
Ans: Following are the features of equity share:
1. Equity share is a means of raising capital.
2. Equity share is a part of the ownership of the business.
3. Equity share can be transferred to another person.
4. Equity share represents the ownership of the business.
5. Equity share is unsecured as compared to other sources.
6. Equity share is permanent in nature.
7. Equity share is governed by law.
8. Equity share provides meeting and voting rights.
9. Equity share provides dividend to its member.
