Chapter 2: Characteristics of Equity Shares

Learning Objectives

After studying this chapter, you should understand:

• Categories of equity investors (Promoters, Institutional Investors, Retail, HNIs).
• Statutory rights and privileges of equity shareholders.
• Risk dimensions associated with equity investing (market risk, liquidity risk, residual claim).
• Key equity capital terminology: Authorized, Issued, Subscribed, Paid-up Capital, and Share Premium.
• Corporate actions: Cash Dividends, Stock Splits, Consolidations, Bonus Issues, and the Record Date / Ex-Date mechanism.
• Operational taxonomy of Preference Shares.
• Mechanics of Rights Issues and secondary trading of Rights Entitlements (REs).

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2.1 Investors in Equity Shares

                            EQUITY MARKET INVESTORS
                                       │
         ┌───────────────────┬─────────┴─────────┬───────────────────┐
         ▼                   ▼                   ▼                   ▼
     PROMOTERS         INSTITUTIONAL       RETAIL INVESTORS    HIGH NET-WORTH
                        INVESTORS                               INDIVIDUALS
   Founders; provide   Mutual Funds, AIFs, Non-professional    Non-institutional
   initial risk        Insurers, Pension   investors; bids up  individuals investing
   capital; control.   Funds, FPIs.        to ₹2 Lakhs in IPO. > ₹2 Lakhs in IPOs.

Investor Categories Defined

1. Promoters: Entrepreneurs who conceptualize the venture, provide early risk capital, and usually retain majority voting control.
2. Institutional Investors (DIIs & FPIs): Professional entities deploying pooled funds (Mutual Funds, Insurance companies, Pension funds, FPIs). Guided by SEBI’s Stewardship Code requiring active governance monitoring and voting participation.
3. Retail Individual Investors (RIIs): Defined under SEBI (ICDR) Regulations as investors who apply or bid for securities of a value of not more than ₹2,00,000 (Two Lakh Rupees) in a public issue.
4. Non-Institutional Investors (NIIs) / HNIs: Individual investors who bid for securities exceeding ₹2,00,000 in public issues, as well as resident corporate bodies, trusts, societies, and partnership firms.

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2.2 Legal Rights of an Equity Shareholder

1. Ownership & Governance Rights:
   • Every ordinary equity shareholder possesses the democratic right to vote on company resolutions in proportion to their share of paid-up equity capital ("One Share = One Vote").
   • Right to attend Annual General Meetings (AGMs) and Extraordinary General Meetings (EGMs) in person, via proxy, or through electronic voting (e-voting).
2. Economic Rights:
   • Right to receive dividends when declared by the Board of Directors and approved at the AGM.
   • Pre-emptive rights under Section 62 of the Companies Act to subscribe to fresh shares (Rights Issue) to maintain proportionate ownership.
   • Residual claim on company assets upon liquidation after satisfying all prior creditors.
3. Inspection Rights:
   • Right to inspect statutory company registers (Register of Members, Minutes of General Meetings).
   • Right to receive annual financial reports (Balance Sheet, Profit & Loss Account, Auditor's Report).

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2.3 Risk Dimensions in Equity Investing

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2.4 Equity Capital Terminology & Arithmetic

┌─────────────────────────────────────────────────────────────────┐
│                    AUTHORIZED CAPITAL                           │
│   Maximum capital company is authorized to raise in its MoA     │
│   Example: 2,00,00,000 shares of ₹10 each = ₹20 Crores          │
├────────────────────────────────┬────────────────────────────────┤
│         ISSUED CAPITAL         │       UNISSUED CAPITAL         │
│   Capital offered to investors │   Portion retained for future  │
│   Ex: 1,00,00,000 shares = ₹10 Cr│   Ex: 1,00,00,000 shares = ₹10 Cr│
├────────────────────────────────┴────────────────────────────────┤
│                       SUBSCRIBED CAPITAL                        │
│   Portion of issued capital applied for and accepted by public  │
│   Ex: 95,00,000 shares = ₹9.5 Crores                            │
├────────────────────────────────┬────────────────────────────────┤
│        PAID-UP CAPITAL         │       CALLS-IN-ARREARS         │
│   Actual money received        │   Called-up amount unpaid      │
│   Ex: ₹9.50 per share = ₹9.025 Cr│   Ex: ₹0.50/sh = ₹4,75,000   │
└────────────────────────────────┴────────────────────────────────┘

• Face Value (Par Value): Denominated nominal value of each share as established in the Memorandum of Association (e.g., ₹1, ₹2, ₹5, ₹10). Dividend percentages are always calculated on the Face Value, never on market price! $$\text{Dividend per Share (DPS)} = \text{Face Value} \times \text{Dividend Percentage}$$
• Share Premium: The excess amount received over the face value of shares: $$\text{Share Premium per Share} = \text{Issue Price} - \text{Face Value}$$
• Paid-Up Capital: Actual amount of money received by the company from shareholders against subscribed shares.

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2.5 Corporate Actions & Operational Processing

Corporate actions bring material changes to a company's capital structure or financial performance:

1. Cash Dividends:
   • Interim Dividend: Declared by the Board of Directors between two AGMs.
   • Final Dividend: Recommended by the Board and approved by shareholders at the AGM.
   • Taxation: Dividends are taxable in the hands of shareholders at their slab rates; TDS at 10% is deducted under Section 194 if dividend paid to a resident exceeds ₹5,000 in a financial year.
2. Stock Splits vs. Stock Consolidations:
   • Stock Split: Face value is subdivided (e.g., ₹10 split into ₹2). Number of shares increases; total paid-up capital and shareholder wealth remain unchanged.
   • Stock Consolidation: Multiple shares are combined into one higher face value share (e.g., two ₹5 shares consolidated into one ₹10 share).
3. Bonus Shares:
   • Additional free shares issued to existing shareholders in proportion to their holding (e.g., a 1:1 Bonus Issue gives 1 additional share for every 1 share held).
   • Issued by capitalizing free reserves or securities premium without any cash inflow or outflow.
4. Record Date & Ex-Date:
   • Record Date: Cut-off date to identify eligible beneficial owners in depository records.
   • Ex-Date: The date on which shares trade without entitlement to the benefit. Under T+1 rolling settlement, the Ex-Date is identical to the Record Date.

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2.6 Rights Issues & Preferential Allotments

• Rights Issue (Section 62): Existing shareholders have statutory pre-emptive rights to subscribe to fresh shares in proportion to their holding. Rights Entitlements (REs) are credited in dematerialized form and can be traded on stock exchanges.
• Preferential Allotment: Private placement of equity shares or convertible securities by a listed company to a select group under Section 42 of the Companies Act and SEBI (ICDR) Regulations. Requires Special Resolution and is subject to lock-in rules (6 months for non-promoters; 18 months for promoters).

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Chapter Summary & Exam Cheat Sheet

• Retail Individual Investor (RII): Maximum bid value of ₹2,00,000 in public offerings.
• Voting Principle: Standard ordinary equity operates on One Share = One Vote.
• Pre-emptive Right: Mandated under Section 62 of Companies Act to protect against dilution.
• Dividend Base: Dividend percentage is ALWAYS calculated on Face Value, never on market price.
• Dividend TDS: 10% TDS under Section 194 if dividend exceeds ₹5,000 in a financial year.
• Stock Split: Divides face value, increases share count; paid-up capital remains unchanged.
• Bonus Issue: Capitalizes reserves into paid-up equity; net worth remains unchanged.
• Rights Entitlements (RE): Credited electronically to demat accounts; tradable on stock exchanges.