Define Equity Shares and explain its features.
Meaning: -According to the companies Act, 1956. “All shares which are not preference shares are equity shares”. The capital collected by a company by issuing equity shares is called Equity Shares Capital. Equity shares do not have claim prior to preference shares for payment of dividend and repayment of capital. If a company does not earn profit in a particular year then equity shareholders will not get any dividend. Thus, the equity share capital is also called as Risk Capital.
Features of Equity shares capital: -
- No preferential (special) rights: -Equity share holders get dividend only after the dividend is paid to preference shareholders. Similarly, at the time of winding up of the company, the claim of equity shares is considered at the end.
- No fixed rate of dividend: -Company does not commit any fixed rate of dividend on equity shares. The rate of dividend keeps changing from year to year as per company’s financial position. The rate of dividend is recommended by Board of Directors every year and declared by share holders.
- Voting Rights: -Every equity shareholder has voting right in the proportion with the shares held by him. They can vote on all the matters placed before the meeting. As per the rights conferred upon the equity shareholders by the companies Act, the voting rights can be exercised either personally or through proxy (only after observing certain rules)
- No claim on unpaid dividend: -If a company incurs loss or earns less profit in a particular year then it does not pay any dividend to equity share holders. The equity shareholders cannot claim this dividend in future.
- Irredeemable nature: -Company does not repay the money raised through equity shares during its lifetime. This money is repaid only at the time of winding up of the company.
- Chances of prosperity (richness): -Equity shareholders are paid dividend at fluctuating rate as per the profits of the company. They claim the entire amount of residual (remaining) of distributable profits. So, if company earns well, the equity shareholders also prosper along with the company.
- Privileges (rights): - It is the privilege and right of equity shareholders to have priority in purchasing shares in case of further public issue of shares. It is called as Right Issue. Equity shareholders are also entitled to receive bonus shares which are issued by companies as a gift.
- Less face Value : - As compared to preference shares, the equity shares are of less face value like Rs 10/- or even Rs 1/-