Features of Equity Shares-Commerce Std-XII/HSC, NCERT-Class 11 Business Studies


Features of Equity Shares: Permanent Capital – The amount invested by equity shareholders is permanent capital for
the business. It is not repayable to the equity share holders during the tenure of
the company. The capital is to be repaid by the company only in the event of the
winding up of the company. So equity provides a permanent capital, a long-term
capital to the organization. Equity shareholders enjoy the certain rights. They
have a right to get share in profit. The share in profit which is distributed
among the equity share holders is called dividend. Thus equity shareholders have
a right to get a share of profit of the company. Equity shareholders also have the right to vote. They have a right to vote and elect the board of directors of
the company. The board of directors of the company run the business on behalf of
the equity shareholders. They also have a right to vote for amendment of the
memorandum as well as articles of association. Equity shareholders are the
owners of the company and hence they have the right to inspect the books of
accounts of the company any time. They also have the right to transfer their
shares. Equity share capital is not repayable during the tenure of the company. The capital of equities is paid back only at the time of winding up of the
company. However if any shareholder wants to
transfer his shares, he can do so. This right to transfer the share is one of
the most important rights of the shareholders.
Every equity share holder has a right to receive a share in
the profits of the company. His share in the profit of the company is called as
dividend However this dividend is not fixed. This
dividend is not provided at a fixed rate to the shareholders. The dividend paid to
equity shareholders depends upon the profit of the company. If the company
makes good profits then equity shareholders get good dividends.
However if company doesn’t make any profit or makes very less profit, chances
are that equity shareholders may not even get the dividend. So the dividend amount is very fluctuating in nature. Thus the returns that equity
shareholders get on their investment in the company are fluctuating in nature.
No Preferential Rights – Equity shareholders do not have any
preferential rights unlike preference shares. In case of
preference shares, the dividend is fixed and is paid before the dividend is paid
to the equity shareholders. Equity shareholders are the last to receive the
dividend. Out of the profits made by the company, the company first pays interest
on external loans. So interest on external loans is first paid. After that
preference dividend is given, dividend is paid to is paid on the preference shares and
only after that the equity shareholders get the dividend. So if no profit is left
after giving dividend to preference shareholders, then equity shareholders
won’t get any dividend Similarly at that time of winding up of
the company, the proceeds received from sale of assets of the company are first
used to pay off the external liabilities. Once the external liabilities are paid
then the preference share capital is repaid. Once the amount has been repaid
to preference shareholders, after that the equity shareholders can
get their capital. Thus equity shareholders are the last when it comes
to payment of dividend or when it comes to repayment of the
capital at the time of the winding up of the company. Risk Takers – Equity
shareholders are the ones who take the maximum risk in the company. The dividend
to equity shareholders is paid at the last after repayment of interest on
external liabilities and after paying dividend to preference shareholders.
Similarly the capital repayment also happens at the last to equity
shareholders. At the time of closure of the business, the amount received by
selling the assets of the company is first used to repay the external
liabilities. Then the repayment of preference share capital is made and
only after that equity shareholders can get their capital. Thus they are the true
risk bearers of the company. Equity shareholders control the company. The control
of the company lies in the hands of equity shareholders. This is because they
have the right to vote. They have the right to elect board of directors who
control the company, manage the company on behalf of equity shareholders. Thus
equity shareholders are the ones who have control over the company. Residual Claimants – Equity shareholders are residual claimants. This is because the
dividend is paid to equity shareholders only after the interest of all external
liabilities is paid and after the preference dividend has been given. The
profits of the company are first utilized to pay off interest on all
external loans/liabilities and then it is utilized to pay off the dividend of
the preference shares and the dividend to equity shareholders
is paid only out of the remaining amount Again in case of winding up of the
company, they are the last one to receive the payment. In case of winding up or
closure of the company, the amount received by the company by selling off its
assets is first utilized to pay off all outside liabilities/outside loans. Then
the amount is paid to preference shareholders and if there is anything
left after paying off the preference shareholders, then the remaining among is
paid to the equity shareholders. Thus they are the residual claimants in the
company. Eligible for bonus or rights issue – The equity shareholders are
eligible to get bonus shares and rights shares. Bonus shares are the shares which
are given to equity shareholders by the company out of the profits accumulated
by the company. Bonus shares are given free of cost.
Generally the profit made by the company is not completely distributed among the
equity shareholders as a dividend. Generally a part of profit is kept aside
by the company and only a part of profits is distributed as a dividend
among the equity shareholders. The bonus shares are given free of cost to equity
shareholders out of these accumulated profits. The profits which company
accumulates over the period of time is utilized to give bonus shares to the
existing shareholders. Equity shareholders also get the benefit of the
rights issue What is rights issue? Whenever the
company requires additional capital for expansion of business or for any other
reasons, they may decide to raise those funds by issue of equity shares. Thus
they may issue more shares to raise further capital. In such circumstances,
companies generally give existing shareholders the right to buy those
shares. These shares are not given to the shareholders free of cost. This is called
as a rights issue. Thus under issue, the first option for buying the
shares is given to the existing shareholders. Under rights issue, the
option to buy the shares is first given to the existing shareholders

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