Equity Share and its Types Equity share is a main source of finance for any company giving investors rights to vote, share profits and claim on assets. Various types of equity capital are authorized, issued, subscribed, paid up, rights, bonus, sweat equity etc. The value of equity shares are expressed in terms of face value or par value, issue price, book value, market value etc. In the world of financial and investment management, ‘equity share’ is a big word frequently used in every next discussion. We call it stock, ordinary share, or shares, all are one and the same. Explaining equity shares in a page or a bunch of pages is very difficult. Let us still try to define it in as summarized manner as possible. Equity share is one of the main sources of finance for any company. Normally, a company is started with equity shares as its first source of capital from the owners or promoters of that company. After a certain level of growth, more capital is required for further growth.The company then finds investor in the form of friends, relatives, venture capitalists, mutual funds, or any such small group of investors and issue fresh equit y shares to these investors. A point comes where the company reaches a very big level and requires huge capital investment for business growth. It then offers its equity share to general public. This is called Initial Public Offer (IPO). More such issues in future are called Follow on Public Offer (FPO). Equity Shares:
They are categorized under long term sources of finance because legally they are irredeemable in nature. For an investor, these shares are a certificate of ownership in the company by virtue of which investors are entitled to share the net profits and have a residual claim over the assets of the company in the event of liquidation. Investors have voting rights in the company and their liability to company is limited to the amount of investment. Types of Equity Shares:
There are various types of equity shares classified cl assified based on various things. In the financial statements of a company, equity shares are placed in the liability side of the balance sheet. They are classified into various categories which are as follows:
Authorized Share Capital: It is the maximum amount of capital which can be issued by a company. It can be increased from time to time. Some fee is required to be paid to legal bodies accompanied with some formalities. Issued Share Capital: It is that part of authorized capital which is offered to investors. Subscribed Share Capital: It is that part of Issued capital which is accepted and agreed by the investor.
Paid Up Capital: It is the part of subscribed capital, the amount for which is paid by the investor. Normally, all companies accept complete money in one shot and therefore issued, subscribed and paid capital becomes one and the same. Conceptually, paid up capital is the amount of money which is actually invested in the business.
There are other types of equity shares discussed below:
Rights Share: These are the shares issued to the existing shareholders of a company. Such kind of shares is issued to protect the ownership rights of the investors. Bonus Share: These are the type of shares given by the company to its shareholders as a dividend. Sweat Equity Share: These shares are issued to exceptional employees or directors of the company for their exceptional job in terms of providing know-how or intellectual property rights to the company.
Various Prices of Equity Shares
Par or Face Value: It is the value of a share at which it is accounted in books of accounts. Issue Price: It is the price at which the equity share is actually offered to the investor. Normally, the issue price and face value of share is same in case of new companies. Share Premium and Share at Discount: When share is issued at a price higher than face value, the excess amount is called premium. Contrary to it, if the share is issued at a price lower than face value, it is said to be issued at a discount. Book Value: It is the ratio of total of paid up capital and reserves and surplus divided by total no. of shares. This is the balance sheet value of shares. Market Value: In case of companies listed on stock exchanges, the market value of the share is the price at which they are sold currently sold in the market.
Preference shares are those, which enjoy the following two preferential rights: 1. Dividend at a fixed rate or a fixed amount on these shares before any dividend on equity shares. 2. Return of preference share capital before the return of equity share capital at the time of winding up of the company.
Preference shares also have a right to participate or in part in excess profits left after been paid to equity shares, or has a right to participate in the premium at the time of redemption. But these shares do not carry voting rights.
Types Of Preference Shares
Following are the major types of preference shares: 1. Cumulative Preference Shares When unpaid dividends on preference shares are treated as arrears and are carried forward to subsequent years, then such preference shares are known as cumulative preference shares. It means unpaid dividend on such shares is accumulated till it is paid off in full. 2. Non-cumulative Preference Shares Non-cumulative preference shares are those type of preference shares, which have right to get fixed rate of dividend out of the profits of current year only. They do not carry the right to receive arrears of dividend. If a company fails to pay dividend in a particular year then that need not to be paid out of future profits. 3. Redeemable Preference Shares Those preference shares, which can be redeemed or repaid after the expiry of a fixed period or after giving the prescribed notice as desired by the company, are known as redeemable preference shares. Terms of redemption are announced at the time of issue of such shares. 4. Non-redeemable Preference Shares Those preference shares, which can not be redeemed during the life time of the company, are known as non-redeemable preference shares. The amount of such shares is paid at the time of liquidation of the company. 5. Participating Preference Shares Those preference shares, which have right to participate in any surplus profit of the company after paying the equity shareholders, in addition to the fixed rate of their dividend, are called participating preference shares. 6. Non-participating Preference Shares Preference shares, which have no right to participate on the surplus profit or in any surplus on liquidation of the company, are called non-participating preference shares. 7. Convertible Preference Shares Those preference shares, which can be converted into equity shares at the option of the holders after a fixed period according to the terms and conditions of their issue, are known as convertible preference shares.
8. Non-convertible Preference Shares Preference shares, which are not convertible into equity shares, are called non-convertible preference shares.
