Features of Equity Shares

Maturity

Equity Shareholders can demand their capital only at the time of liquidation of  the company and after the claims of others, including preference share holders are settled.

Claims / Right to Income

Equity shareholders have a residual claim on the income of the company.  The distribution and the rate of dividend to equity shareholders, is left to the discretion of the Board of Directors of the company under the Companies Act, 1956 There may be occasions of no residue after paying others including preference shareholders. Even if there are sufficient funds, equity shareholders can’t force for dividend. The residual income not distributed will also benefit the equity shareholders by way of enhanced earning capacity and capital appreciation.

Claim on Assets

In the event of liquidation of the company, priority is given to creditors and preferred stock holders in settling the claims. The equity shareholders are entitled for all whatever left only after meeting all the other claims. Hence, equity share capital provides a cushion for creditors to absorb losses on liquidation. Ultimately, equity shareholders may or may not get paid fully.

Voting Rights and Control

Every Equity shareholder has voting right equivalent to the number of shares held on resolutions in the meetings of the company. Since a company is managed by Directors who are appointed in the Annual General Meeting by majority votes, shareholders exercise indirect control in the working and management of the company. The voting rights may be exercised by a shareholder through a proxy also.

Pre-emptive Right

This is a right of the existing shareholder to purchase new shares in proportionate to the number of shares held. As per Section 81 of the Companies Act, 1956, the new shares shall be offered in proportion to existing equity shareholders. This is done to protect the interests of the existing shareholders from diluting the share holdings investment or accumulated profits.

The main features of equity shares can be summarized as

• They are permanent in nature.
• Equity shareholders are the actual owners of the company and they bear the highest risk.
• Equity shares are transferable, i.e. ownership of equity shares can be transferred with or without consideration to other person.
• Dividend payable to equity shareholders is an appropriation of profit.
• Equity shareholders do not get fixed rate of dividend.
• Equity shareholders have the right to control the affairs of the company.
• The liability of equity shareholders is limited to the extent of their investment.