Every business requires significant working capital to keep things running smoothly. This type of capital is useful when the company’s regular operations are hampered by financial constraints. Companies frequently use their equity shares to raise the necessary capital known as equity share capital.
What are Equity Shares?
Individuals must first become acquainted with the meaning of equity shares in order to comprehend equity share capital.
Ordinary shares or equity shares that represent a company’s ownership stake. A company’s shares also serve as a source of investment for the company.
Individuals who own equity shares are also said to own a portion of a company.
The benefits of equity share capital to shareholders are–
- Fair liquidity: Share prices are directly proportional to fluctuations in the market or to the company’s revenue generation. They may even be affected on both.
- Profitability: Investors not just benefit from the capital appreciation feature of equity shares but also earn regular dividends on their investments.
- Control on management: Shareholders with a significant per cent of shareholding can influence a company’s management significantly.
What is Equity Share Capital?
The capital raised by a company through the issuance of shares is known as equity share capital or share capital. It is the money that business owners and investors put into a company’s capital to help it grow or expand its operations.
Why Company Issues Equity Shares?
A company will typically invite the general public to purchase its shares in order to gain fractional ownership of the company. Dividends are paid to shareholders who own stock.
Typically, a large privately held company will issue stock for public trading on a stock exchange.
However, capital generation is the primary reason why both small and large companies issue shares to the general public in the first place.
The equity share capital thus raised through the issuance of equity shares is used to further the company’s business venture.
Furthermore, having a large capital base allows them to improve their market creditworthiness.
When a company issues shares for purchase by investors, it also offers the opportunity to earn a portion of its profits as well as a stake in its equity.
Types of Equity Share Capital?
Several types of equity shares help companies generate equity share capital.
The following highlights types of equity share capital –
- Authorised share capital: The maximum amount of capital that a company can issue is known as authorised share capital. Companies can increase their permissible limit for authorizing shares after obtaining permission from the relevant authority and paying the required fees.
- Issued share capital: The shares that a company offers to its investors are referred to as issued share capital.
- Subscribed share capital: It is the portion of the issued share capital that the investors agree on and accept.
- Right shares: Right shares are the shares that are issued to individuals after they have invested in equity shares. They are issued to protect the ownership of existing investors.
- Sweat equity shares: Companies give shares to their employees or directors as a token of appreciation for a job well done. These are referred to as sweat equity shares.
- Paid-up capital: It is a portion of the subscribed capital in which the company invests.
- Bonus shares: These shares are distributed to investors as a dividend.
Risks Associated with Equity share capital?
The drawbacks of equity shares tend to magnify the risks that are associated with equity share capital.
Risks while trying to Generate Equity Share Capital –
- No Takers
A company may issue equity shares to the general public. Investors nowadays have a better understanding of how the investment market works and which activities will be more beneficial to them. They gather extensive data and analyze an investment option to assess its prospects before investing.
If a company’s shares do not meet the requirements or expectations of its investors, they will not invest in them. The company will fail to generate equity share capital if there are no buyers in the stock market.
- Insufficient Capital Generation
Even if a company is able to acquire enough shareholders in exchange for their company shares, the likelihood of generating enough capital is still quite low.
Investors can choose from a variety of equity share options on the stock exchange market. The availability of a large number of investment options frequently limits the possibility of generating sufficient equity share capital, rendering efforts to issue shares ineffective.
- Higher Liabilities
Companies that issue a large number of shares at a low face value risk losing more investors than they bargained for.
Having a large shareholder base is effective only when the number of shareholders is kept within a manageable range. When the number becomes unmanageable, the company’s liability burden increases because they must pay a larger portion of the returns as a dividend than they had bargained for. A higher liability burden defeats the purpose of raising equity share capital and is also detrimental to the company’s long-term viability.
To keep track of their equity share investments, shareholders can set up an equity share capital account and keep a ledger for such transactions. Companies that sell equity shares should keep an equity share capital account to track the growth of their equity share capital.
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