Equity n debt assignment

By Vansh Nishar
What are equity shares?
They are the real owners of the company. Full voting rights are guaranteed to equity shareholders. They
participate in the meetings of the shareholders, elect directors and approve major changes in the
policies and programmes of the company. Equity shares are listed at the stock exchange and are freely
transferable.

The rate of dividend is not fixed. It is decided by the board of directors on the basis of profits left after
making payments of preference shares dividend. Therefore, the investors bear the maximum risk but
may enjoy the maximum profits if the company’s performance is good.

Features of Equity Shares Capital?

Equity share capital remains with the company. It is given back only when the company is closed.

Equity Shareholders possess voting rights and select the company’s management.

The dividend rate on the equity capital relies upon the obtainability of the surfeit capital. However,
there is no fixed rate of dividend on the equity capital.

Advantages of Equity Shares

1. Permanent capital – The funds raised through issue of equity shares is permanent capital for the
company. It is not required to be refunded during the lifetime of the company. This amount is mostly
used to generate fixed assets of the company.

2. No charge on assets – A company is not required to mortgage or create a charge on the assets of the
company for raising funds through issue of equity shares.

3. No burden on profits – It is not obligatory on the part of the company to pay dividend on equity
shares in case the profits are not sufficient or the company decides to retain profits for expansion or
modernisation.

4. Voting rights – Equity shareholders have full voting rights and participate in the meetings of
shareholders. They elect directors and approve major policy changes.

5. Higher dividend – The rate of dividend on equity shares is not fixed. It depends upon profits, in case
the earnings of the company are good, the directors recommend high rate of dividend.

6. Capital appreciation – Equity shares are listed at the stock exchange and the prices of shares go up in
case the performance of the company has been good and the market conditions are also favourable

Disadvantages of Equity Shares

1. Manipulation of control – The management of the company may be manipulated by few shareholders
to maintain the control of the company in their own hands. Sometimes, they may not work in the
interest of the company.
 Equity n debt assignment

2. Overcapitalisation – The funds raised through equity shares are not returned during the lifetime of
the company. Sometimes, more capital is raised than required which results in overcapitalisation. It
reduces earnings per share.

3. Costly – The cost of raising funds through issue of equity shares is high. A lot of money is spend on
underwriting commission, brokerage and other expenses.

4. High risk – Equity shareholders bear the maximum risk. They are the last to get return on their
investment, i.e., dividend and the capital when the company is closed.

5. Uncertainty of dividend – Dividend on equity shares is paid only out of profits. In case, the profits are
not sufficient, no dividend is paid.