Equity Share Capital

To maintain operational continuity, every company needs a significant amount of working capital. This capital becomes particularly crucial when a company encounters financial constraints that could disrupt its regular activities. In many cases, companies utilise their equity shares to generate the necessary funds, which is commonly referred to as equity share capital.

What are Equity Shares?

Equity Share Capital Definition- To grasp the concept of equity share capital, one must acquaint themselves with the definition of equity shares.

Equity shares, commonly known as ordinary shares, symbolise ownership interest in a company. When a company sells shares, it serves as a means of obtaining investment for the company.

Furthermore, individuals who possess equity shares are considered to have a partial ownership of the company.

What Are The Features Of Equity Share Capital?

Now, it is important to have some understanding of equity share capital. To provide you with a clearer understanding, let’s swiftly go through its characteristics.

Permanent Nature

The equity shares issued by the company are permanent and cannot be redeemed. These shares cannot be returned unless the company decides to liquidate or cease its operations.

Dividend Pay-Out and Transferable

Equity shares can be transferred, allowing for the easy transfer of ownership to another investor.
Furthermore, equity shareholders receive dividends on their shares. The dividend amount is dependent on the company’s profits for the specific year and the availability of funds. Consequently, if a company experiences losses, it does not distribute dividends in that particular year.

High Return Potential

Undoubtedly, equity shares represent a high-risk and volatile investment. However, the potential returns that shareholders can earn from these shares are substantial.

Therefore, if you have a high risk tolerance or the ability to withstand risks, equity shares are the suitable option for you. By leveraging the returns on equity shares, you have the opportunity to generate wealth.

What Are The Types of Equity Share Capital?

After familiarising yourself with the characteristics, have you decided to invest in equity shares? Are you curious about the available options for investment? Take a look at the various types of equity shares listed below, and you will find the answers you seek!

Authorised share capital:

Authorised share capital refers to the maximum number of shares that a company is legally permitted to issue to its shareholders. It represents the total value of shares that a company is authorised to offer to investors. The authorised share capital is specified in the company’s constitutional documents, such as the memorandum of association.

Issued share capital:

Issued share capital refers to the portion of authorised share capital that a company has actually issued or allocated to shareholders. It represents the total value of shares that have been issued and allotted to investors. The issued share capital may be less than or equal to the authorised share capital, depending on the number of shares the company has decided to allocate.

Subscribed share capital:

Subscribed share capital refers to the portion of issued share capital that shareholders have agreed or committed to subscribe to or purchase. It represents the total value of shares for which shareholders have made a contractual commitment to acquire. Subscribed share capital may be less than or equal to the issued share capital, depending on the extent to which shareholders have exercised their right to subscribe to shares.

Right shares:

Right shares refer to additional shares that a company offers to its existing shareholders in proportion to their existing shareholding. These shares are issued as a way for the company to raise additional capital from its current shareholders. Existing shareholders are given the right to purchase these new shares at a predetermined price and within a specified timeframe. The purpose of right shares is to provide existing shareholders with an opportunity to maintain their proportional ownership in the company and participate in its future growth.

Sweat equity shares:

Sweat equity shares are a form of compensation given to individuals, typically employees or founders, for their contributions in the form of intellectual property, skills, or know-how rather than monetary investment. These shares are issued at a discounted or nominal price and are aimed at recognizing and rewarding the efforts and value added by the individuals to the company. Sweat equity shares provide an opportunity for individuals to acquire ownership in the company based on their non-financial contributions.

Paid-up capital:

Paid-up capital refers to the portion of the subscribed share capital that shareholders have actually paid for and contributed to the company. It represents the total amount of money received by the company from shareholders in exchange for the shares they have subscribed to. Paid-up capital demonstrates the financial commitment of shareholders and forms part of the company’s capital structure. The amount of paid-up capital may be equal to or less than the subscribed share capital, depending on the extent to which shareholders have fulfilled their payment obligations.

Bonus shares:

Bonus shares, also known as scrip dividends or capitalization issues, are additional shares that a company distributes to its existing shareholders without any additional cost. These shares are issued as a bonus or reward to shareholders based on their current holdings in the company. The purpose of bonus shares is to capitalise the company’s retained earnings or reserves and convert them into additional shares.

Bonus shares are typically issued in a proportionate manner, meaning that shareholders receive bonus shares in proportion to their existing shareholding. For example, if a company announces a 1:1 bonus issue, shareholders will receive one bonus share for each share they already own. The issuance of bonus shares increases the total number of shares outstanding, but it does not change the overall value or ownership percentage of the shareholders.
By issuing bonus shares, the company aims to increase liquidity in the stock, enhance shareholder value, and potentially attract new investors.

What Are The Benefits Of Equity Share Capital?

Equity share capital is a widely used method for businesses to raise funds and offers numerous benefits. Here are some of the advantages associated with equity share capital:

Permanent capital:

The equity share capital of a company represents its long-term capital and does not need to be repaid, distinguishing it from debt financing. This characteristic helps maintain a stable capital structure for the company and minimises financial risk.

Cost-effective Source of Finance:

In contrast to debt financing, equity share capital is a more economically efficient means of raising funds for a company. This decreases the financial load on the company, enabling it to allocate a greater portion of its resources towards growth and expansion endeavours.

No Obligation to Pay Dividends:

Unlike debt financing, there is no mandatory requirement to distribute dividends to equity shareholders. This grants the company flexibility in determining dividend payments, allowing them to be contingent on the company’s financial performance.

Attracts Long-term Investors:

Equity share capital appeals to investors with a long-term perspective, who are invested in the growth and prosperity of the company. This contributes to a stable shareholder base for the company, mitigating the risk of abrupt changes in ownership.

Final Thoughts:

Equity share capital represents ownership in a company and serves as a permanent source of funds. It offers several advantages such as stability in the company’s capital structure, reduced financial risk, and flexibility in dividend payments based on financial performance. Equity share capital attracts long-term investors, fostering stability in the shareholder base and minimising the risk of sudden ownership changes. It is a cost-effective means of financing, allowing companies to allocate more resources towards growth and expansion. Overall, equity share capital plays a crucial role in raising funds, incentivizing investors, and supporting the long-term success of businesses.