What Is the Meaning of Equity Share?

Businesses procure money for their operations by issuing debt and equity capital.
Companies are legally bound to pay their creditors interest income along with the
original capital amount. There are two forms of equity capital: Preference (Preferred)
Shares and Equity (Common) Shares. The preference shareholders have priority over
equity shareholders in payments of dividends and when the company is terminated.

Equity shareholders are the actual owners of the company.They have voting rights and
share all the money remaining after the business' obligations are met.

Features
The company provides preemptive rights to all its equity shareholders. When the
company issues new equity shares, it must first offer them to the existing equity owners
in accordance with their present ownership ratio. For example, an equity owner has
10,000 of the 1 million in issued capital, so he has a 1 percent stake in the company. Next
time, whenever new shares are issued, 1 percent of the total issued capital must first be
presented to him. It is at the discretion of the shareholder whether to purchase them or
decline the offer. When the offer is declined, the company then presents the shares to
outside investors.

Advantage & disadvantage of Equity shares

Advantage of Equity Shares:
Non recurring fixed payments:
Equity shares are not a burden on the resources of the company. If the company has sufficient
profits and the directors also recommend, dividend may be declared.
No charge:
The company get equity capital without creating of any charge on the assets of the company.
Long-term funds:
During the life time of the company, the question of refunding the equity capital does not arise.
So this capital forms the permanent long-term resource-base of the company.
Capital formation:
Since the equity shares are of small face value, even poor people can because members of big
companies. This helps the capital formation of the country.
Credit worthiness:
Creditors will readily lend money to the company which is having a huge amount of equity
capital.
Ownership:
Equity shareholders are the real owners of the company. They have full voting rights. They elect
directors to manage the company.
Rights issues:
If new equity shares are issued by an existing company, they are first of all to be offered to the
existing shareholders. Such shares are called as rights shares.
Disadvantage of Equity Shares:
Inability to refunds:
If there arises over capitalization because of wrongful equity share issues, the excess amount
cannot be refunded.
Difficulty in trading on equity:
If only equity shares are issued, the company cannot trade on equity.
Concentration of control:
Rights issue may lead to concentration of control of the company in the hands of a few persons.
Not always acceptable:
Because of the uncertainty of the return on the equity shares, conservative investors hesitate to
purchase them.
Dividend at the boards mercy:
The rate of dividend is recommended by the board. The shareholders in the AGM cannot declare
a higher rate than what is recommended by the board.
Llliquid:
Since equity shares are not refundable they are treated as illquid.
Speculation:
higher dividends during persperous periods and low dividend during depression period shall lead
to ample speculation.

PREFERENCE SHARE
Preference sharesare those shares on which there is preference right
(a) to claim dividend during the life time of thecompany,
(b) to claim repayment of capital on the winding up.
The percentage of dividend is fixed. The holders of preference shares get the fixed dividend
before any dividend is paid to other classes of shareholders. At the time of winding up of the
company, the preference shareholders can get back their capital before any other classes of
shareholders can get back their money.
1. Cumulative preference shares.
2. Non-cumulative preference shares.
3. Participating preference shares.
4. Non-participating preference shares.
5. Convertible preference shares.
6. Non-convertible preference shares.
7. Redeemable preference shares.
8. Guaranteed preference shares.
1) Cumulative preference shares:
If in any year the company does not earn adequate profit, dividends on preference shares may
not be paid for that year. In case of cumulative preference shares, such unpaid dividend is
treated as arrears. The arrears will accumulate and they will be payable out of the profits of the
subsequent years. Dividend on other classes of shares can be paid only after the payment of
such arrears. If the articles are silent, all preference shares are assumed to be cumulative
preference shares.
2) Non-cumulative preference shares:
The dividend on these shares are payable only of the profits of the current year. If in any year the
company does not earn adequate profit, the holders get no dividend (or) partial dividend. In that
case, the unpaid dividend will not be carried forward to subsequent years. The holders cannot
claim arrears of dividend.
3) Participating preference shares:
During the life time of the company in addition to the fixed dividend, the shareholders of his kind
of share have a right to participate in the surplus of profits which remains after payment to the
equity shareholders. At the time of winding up in addition to their shares, the shareholders have a
right to participate in the surplus of assets which remains after payment to the equity
shareholders. The surplus will be distributed between the participating preference shareholders
and equity shareholders in an agreed ratio.
4) Non-participating preference shares:
The holders of the this kind of shares have no right either to participate in the surplus of profit
which remains after payment to equity shareholders (during the life time) (or) to participate in the
surplus of assets which remains after payment to equity shareholders (at the time of winding up).
If the articles are silent, all preference shares are treated as non-participating preference shares.
5) Convertible preference shares:
The holders of this kind as shares have a right to convert their shares into equity shares within a
specified period.
6) Non-convertible preference shares:
The holders of this kind of shares have no right to convert their preference shares into equity
shares.
7) Redeemable preference shares:
The preference shares which can be redeemed after a specified period (or) at the discretion of
the company are called redeemable preference shares:
1.
1. The issue must be authorized by the articles of association.
2. The shares to be redeemed should be fully paid up.
3. The preference shares can be redeemed either out of the profits of the company (or)
out of the new issue of shares made for this purpose.
4. If the redemption is made out of profits, an equal sum should be transferred to the
capital redemption reserve account.
5. The redemption of preference shares does not amount to a reduction of capital.
8) Guaranteed preference shares:
In case of conversion of a private concern into a limited company (or) in case of amalgamation
and absorption, the seller guarantees a particular rate of dividend on pre

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Features of Preference Shares
Preference shares (or preferred stocks) are different from the ordinary shares in that they are given a
preference over the rest. These shares are market instrument issued by the companies to the public with
the primary aim of raising capital for the company.

Following are the three key features of preference shares:

1) Preference Shareholders are entitled to a fixed rate of dividend and therefore they are also known
as fixed income securities. The dividend can be specified as a percentage of the nominal value or as a
fixed amount. They will receive a fixed rate of dividend whether the company has made a huge profit or
even a loss. This is different from ordinary shares whereby the ordinary dividend will only be paid if the
company makes a profit and declares a dividend.

2) Preference shares are comparatively less risky for investors. As such, the investors do not generally
entitled to vote in company matters.

3) Preference Shareholders are given preference in paying the dividend in case the company is wound up.
In other words, they will receive the money first and their accounts will be settled before that of the ordinary
shareholders.

Advantage & Disadvantage of Preference Shares

Advantage of preference shares:
Suitable to cautions investors:
This is suitable for investors who do not like risk and who like to get fixed dividend.
Retention of control:
The existing shareholders can retain their control over the company by issuing preference
shares because the preference shareholders can vote only on matters affecting them. So there
will be no dilution of control.
Attractive types:
Redeemable, convertible and participating preference shareholders are more attractive. There
are very helpful to investors and so they have ready market.
Convenience:
In case of debentures, generally a change (or) mortgage on the assets is created. But the issue
of preference share require no such creation.
Increase in equity shareholders income:
Equity shareholders will get good amount of dividend by issue of preference shares.
Conversion to satisfy legal requirements:
The public deposits of companies which are in excess of companies which are in excess of the
maximum limit fixed by issuing preference shares.
Economical:
Comparing to equity shares, financing preference shares is less costly, so they can be issued for
meeting heavy capital expenditure.
Enabling reconstruction and reorganization:
Whenever a company is reorganized (or) reconstructed, the board with the consent of
thecreditors, can easily convert the debts into preference shares.
Increasing the marketability:
The preference shares can be utilized for raising the value of the equity shares and debentures
in the open market. Everyone who purchase certain number of equity shares may be provided
with certain number of preference shares as bonus.
Good alternative for debentures:
The company having an average annual return but not stable income to provide for regular
debenture interest, can issue preference shares as an alternative to the debentures.

Disadvantages of Preference Shares:

Heavy dividend:
Usually, preference shares carry a higher rate of dividend than the rate of interest on debentures.
Accumulation of dividend:
In case of cumulative preference shares, arrears of preference dividend accumulate. It is a
permanent burden for the company.
Costly:
Comparing to debentures, financing of preference shares in more costly.
No voting rights:
Since preference shares have no voting rights, the interest of the preference shareholders may
be damaged by the equity shareholders.
Way to liquidation:
Sometimes, instead of using the available limited cash for productive purpose, the board may
give it to preference shareholders as dividend. In the long run, this may lead to insolvency.
Affecting the financial status:
The credit worthiness of the company may be affected by existence of preference shares.
Time of redemption:
if the board redeem the deducted for income tax purpose, the company has to earn more.
Otherwise, the dividend to equity shareholders will be affected.

Debentures

Debentures Meaning:
In deposit terminology, the term Debentures refers to a certificate issued by a person or corporation
with the purpose of acknowledging or creating a debt . Debentures are generally unsecured by assets
and are interest bearing securities.

Debentures Example:
For example, most Debentures are essentially unsecured bonds issued by corporations relying on
the credit worthiness of the issuer for their distribution, although a Debenture in the United Kingdom is
usually a secured debt. The interest income that holders of Debentures receive is generally derived
from a companys corporate profits. Some Debentures feature a convertibility option, whereby the
Debenture can be converted into shares of the corporations common stock. These securities are
known as convertible Debentures. Because of the convertibility feature of these securities, they
typically carry lower interest rates than Debentures without the convertibility feature. In the case that
the corporation goes into bankruptcy, the Debenture holders get treated as general creditors.


ADVANTAGES AND DISADVANTAGES
OF DEBENTURES

ADVANTAGES OF DEBENTURES
It involves less cost to the firm than the equity financing because:
i. Investors consider debentures as a relatively less risky investment alternative and
therefore require a lower rate of return.
ii. Interest payments are tax deductible.
iii. The floatation costs on debentures is usually lower than floatation costs on common
shares.
(b) Debenture holders do not have voting rights and therefore, debenture issue does not
cause dilution of ownership.
(c) Debenture holders do not participate in extraordinary earnings of the company. Thus
their payments are limited to interest.
(d) During periods of high inflation, debenture issue benefits the company. Its
obligations of paying interest and principal, which remain fixed, decline
in real terms.

DISADVANTAGE OF DEBENTURES
(a) Debentures issue results in legal obligation of paying interest and principal, which, if
not paid can force the company into liquidation.
(b) Debenture issue increases the firm's financial leverage and reduces its ability to
borrow in future.
(c) Debentures must be paid at maturity and therefore at some point, it involves
substantial cash outflows.
(d) Debentures may contain restrictive covenants which may limit the firm's operating
flexibility in future.



Q4 public deposit
Definition of Public Deposits

Public deposit is the source of fund for private and non-banking companies. It means to accept
fund from public in the form of deposit. The interest on these deposits is more than interest which
is given by banks and post offices.