CHARACTERISTICS OF EQUITY SHARES

CHARACTERISTICS OF EQUITY SHARES (Part 1)

Introduction to Equity Shares

• Definition: Equity shares represent ownership in a company and are issued to raise capital for business expansion or operations.
• Details: Equity capital does not impose liability on the company in terms of returns or repayment, but investors gain proportionate control and ownership.

Investors in Equity Shares

• Promoters: The initial group of investors who set up the company, bringing in risk capital and retaining majority shareholding for control.
• Institutional Investors: Professional investors, such as financial institutions, venture capital firms, and mutual funds, who evaluate business propositions and associated risks.
• Public Investors: Investors who participate in equity through public issues (IPOs), including retail investors, high net worth individuals, and institutional investors.

Rights of a Shareholder

• Ownership Rights: Shareholders have voting rights, allowing them to participate in important decisions, and the right to attend Annual General Meetings (AGMs).
• Right to Dividend: Shareholders are entitled to participate in company profits through dividend payments.
• Ownership Transfer Rights: Investors can sell their shares to other investors, as equity capital is perpetual in nature.
• Other Rights: Shareholders have the right to inspect company documents, seek legal recourse, and may be provided with special rights like anti-dilution rights.

Risks in Equity Investing

• No Fixed Return: Dividend payments are not guaranteed and may vary based on company performance.
• No Fixed Tenor: Equity shares are issued for perpetuity, with no maturity period for return of investment.
• Liquidity Risk: Shareholders may face difficulties in selling shares at market value due to illiquidity or unlisting.
• No Collateral Security: Equity capital is not secured by company assets, with claims ranking last in order of preference.

Equity Terminology

• Face Value: The fixed value of a share, used to calculate dividend payouts.
• Share Premium: The excess amount received by the company over the face value of shares.
• Authorised Capital: The maximum amount of equity capital defined in the company's Memorandum of Association.
• Issued Capital: The portion of authorised capital issued to investors.
• Paid-up Capital: The amount of capital paid by investors to the company.

CHARACTERISTICS OF EQUITY SHARES (Part 2)

Outstanding Shares

• Definition: Outstanding shares refer to the total number of shares issued by the company to its investors.
• Details: The number of outstanding shares can be calculated by dividing the issued capital by the face value of each share.

Paid-up and Issued Capital

• Paid-up Capital: The portion of the issued capital that has been fully paid-up by the shareholders.
• Issued Capital: The portion of the authorized capital that has been issued to shareholders.
• Key Points:
  • Paid-up capital is always less than or equal to issued capital.
  • Issued capital is always less than or equal to authorized capital.
  • Authorized capital is the maximum amount that can be issued or paid up.

Fully Paid-up and Partly Paid-up Shares

• Fully Paid-up Shares: Shares where the entire face value amount is collected from shareholders upfront.
• Partly Paid-up Shares: Shares where the entire face value amount is not collected from shareholders upfront, and the company can make a call for the balance unpaid portion.

Corporate Actions

• Definition: Corporate actions are events initiated by a public company that bring actual changes to the securities issued by the company.
• Types of Corporate Actions:
  • Dividend: Payment of a portion of the company's profit to shareholders.
  • Buyback of Shares: Repurchase of shares by the company from its existing shareholders.
  • Bonus Issue: Issue of additional shares to existing shareholders without any capital contribution.
  • Stock Split and Consolidation: Change in the face value of shares, resulting in a change in the number of outstanding shares.

Preference Shares

• Definition: Shares that offer certain special features or benefits to investors, such as a fixed dividend rate.
• Key Points:
  • Preference shareholders have priority over equity shareholders in the payment of dividends and repayment of capital.
  • Preference shares can be cumulative or non-cumulative, and participating or non-participating.

Rights Issue of Shares

• Definition: An issue of shares to existing shareholders in proportion to their existing holdings.
• Purpose: To prevent dilution of existing shareholders' holdings when a company raises additional capital.

Preferential Issue

• Definition: An issue of shares to a strategic investor or collaborator at a pre-negotiated price.
• Key Points:
  • Requires approval of existing shareholders.
  • Dilutes the proportionate rights of existing shareholders.