What are the Types of Equity Share Capital?

There are several different types of equity share capital investments that investors can choose
from. Let’s have a look at some of them:

 Ordinary Shares: These are the most common type of shares and represent a company’s
basic form of ownership. The company grants ordinary shareholders voting rights, pays
them dividends, and entitles them to share in its profits.

 Preference Shares: Equity vs Preference shares is an ongoing doubt we all face. Thus,
unlike equity shares, a preferential right or a priority claim is exercised by preference
shareholders in the event of liquidation.

 Bonus Shares: The company issues bonus shares to existing shareholders as a reward for
their loyalty and investment. These shares are issued free of cost and do not require the
shareholders to pay anything.

 Right Shares: Existing shareholders are being issued these shares at a discounted price.
Right shares allow shareholders to maintain their percentage ownership in the company
by purchasing additional shares at a discounted price.

 Sweat Equity Shares: The company issues these shares to its employees or directors as
compensation for their service. The company issues sweat equity shares at a discounted
price or for free and imposes a lock-in period before shareholders can sell them.

 Subscribed Equity Shares: These are the shares the company has applied for and
allotted to the investors who have subscribed to them. Thus, the company receives the
subscription money.

Merits of Equity Shares

The merits of raising funds through equity shares are:
1. Ideal for Adventurous Investors: Equity shares are appropriate for investors who are
willing to take on risk in exchange for higher returns.
2. No Obligation to give Dividends: The payment of dividends to equity shareholders is
optional. As a result, the company bears no burden in this regard.
3. Source of Fixed Capital: Equity capital is permanent capital because it is repaid only when
a company is liquidated. It provides a buffer for creditors in the event of a company’s
insolvency because it is listed last on the list of claims.
4. Provides Credit Standing: Equity capital provides the company with creditworthiness and
confidence in potential loan providers.
5. No Charge on Assets: Funds can be raised through an equity issue without placing a
charge on the company’s current assets. If necessary, a company may freely mortgage its assets
in exchange to obtain financing.
6. Democratic Management: The voting rights of equity shareholders ensure democratic
control over the company’s management.
 Merits of Equity Shares\
1. Ownership: Equity shareholders get partial ownership of the company. You will also get voting
rights and contribute your opinion when it comes to the company’s operations and financial
decisions.
2. Dividend Income: Equity shares offer returns in the form of capital appreciation and dividend
income. A dividend is an additional distribution of surplus profits by a company to its
shareholders.
3. Higher Returns: This is one of the primary advantages of equity shares; equity shareholders
tend to get a higher amount of return if the company makes substantial profits. With a solid
trading strategy, you can earn this within a short time.
4. Small Investments: Investment in equity shares can be bought in smaller amounts and become a
shareholder without a high capital requirement. You can even invest in a single share of a
company without any threshold limit.
5. Portfolio Diversification: Investing in equities of different companies helps in portfolio
diversification. This means that even if some companies in your portfolio underperform, you can
gain from the equity investments that you have made in other companies.
6. Limited Liability: If you become an equity shareholder of a company, your liability as a
shareholder is restricted to your amount of investment.
7. Liquidity: Stocks are generally liquid assets whose ownership is easily transferable. This means
you can redeem your current equity shares by quickly selling them off in the stock market.
8. Wealth Creation: Equity shares have the capacity to offer inflation-beating returns helping you
to create a good corpus in the future. However, they do have a risk element which can be negated
if you hold these shares for a long duration.
9. Tax Advantage: Returns from stock investments are taxed as per their holding period. If you
hold your shares for 12 months or more, long term capital gains (LTCG) returns of up to ₹1 lakh
are tax-exempt. LTCG of above ₹1 lakh is taxed at 10%.
On the other hand, if the holding period of stocks is less than 12 months, the short term capital
gains are taxed at 15%.
10. Collateral against Loans: As an equity shareholder, you can pledge your investments with a
bank and get a loan against it. Generally, banks loan up to 50% of the eligible equity shares, and
after repaying this, the pledge gets cancelled.
11. Regulated by SEBI: In India, the regulatory framework created by SEBI is responsible for
protecting the rights of all investors. It has also been instrumental in reducing fraudulent
activities and promoting safe investment.
12. No minimum holding period: There is no minimum holding period requirement for your
investments in equity shares of a company. You can liquidate your invest at any time you want
by selling you shares in the secondary market.
13. Simple Process: The process of investing in equity shares is simple; you can buy them through
offline brokerage houses, financial planners and online brokerage platforms. Moreover, the
account setup process is easy as well as less time-consuming. All you need is a trading account
and a demat account which your broker gets set-up for you, and you are good to go.

Demerits of Equity Shares

The demerits of raising funds through equity shares are:
1. Risk of Fluctuating Returns: Due to the fluctuating returns on equity shares, investors
looking to find a consistent income may not prefer equity shares.
2. High Cost of Capital: The cost of equity shares is typically higher than the cost of raising
funds from other sources.
3. Dilution of Control: The voting rights and profits of current equity shareholders are diluted
when new equity shares are issued.
4. Legal Formalities: Raising money through the issuance of equity shares involves more
formalities and delays in the legal process.
5. Danger of Over-capitalisation: Equity share capital is a permanent source of capital. So, if
due to poor financial planning, a company raises excess equity capital, it may get over-
capitalised and the equity capital may remain underutilised and idle.
Types of Preference Shares

Preference Shares are of the following types:

1. Cumulative Preference Shares: Cumulative Preference Shares are those that have the right
to accumulate unpaid dividends in future years if they are not paid during the current year.
2. Non-Cumulative Preference Shares: Non-cumulative Preference Shares are those on
which dividends do not accumulate. It means that if a company does not declare dividends for
any year, the right of dividend of such shareholders for that year will be lost.
3. Participating Preference Shares: Participating preference shares are preference shares that
have the right to participate in the additional surplus of a company’s shares after a dividend at
a certain rate has been paid on equity shares.
4. Non-Participating Preference Shares: Non-participating preferences are those who do not
have the right to participate in the company’s profits.
5. Convertible Preference Shares: Convertible preference shares are preference shares that
can be converted into equity shares within a certain time frame.
6. Non-Convertible Preference Shares: Non-convertible shares are those that cannot be
converted into equity shares.

Merits of Preference Shares

The merits of raising funds through preference shares are:

1. Consistent Income: Preference shares provide reasonably consistent income in the form of
a fixed rate of return and investment safety.
2. Reasonable Safety of Returns: Preference shares are useful for investors seeking a fixed
rate of return with low risk.
3. No Interference in Management: It has no effect on equity shareholders’ control over
management because preference shareholders do not have voting rights.
4. Trading on Equity: Paying a fixed dividend rate to preference shares may enable a
company to declare higher dividend rates to equity shareholders in good times.
5. Repayment of Principal Amount: In the event of a company’s liquidation, preference
shareholders have a preferential repayment right over equity shareholders.
6. No Charge on Assets: Preference capital does not impose any kind of charge on a
company’s assets.

Demerits of Preference Share

The demerits of raising funds through preference shares are:

1. Limits Appeal: Preference shares are not suitable for investors who are willing to take risks
in exchange for higher returns.
2. Dilutes Claim of Equity Shareholders: Preference capital dilutes equity shareholders’
claims towards the company’s assets.
3. Unreliable and Low Returns: As the dividend on these shares is only paid when the
company makes a profit, there is no guaranteed return for investors. As a result, these shares
may not be very appealing to investors.
4. No Tax Benefits: The dividend is not deductible as an expense from profits. As a result,
there is no tax savings, as in the case of interest on loans.
Advantages of Debentures:

1. Debenture are Preferred by Investors

Since they attract cautious investors by offering definite security and safety of investment, issue
of debentures can raise more funds.
2. Debenture are Less Investment Risk
The interest on debentures is a charge against profits. The date and rate of payment are certain.
So the investors can get interest whether the company makes a profit or not. The company is also
benefited from the point of view of tax, as the interest is a charge against its profit.
3. Less Costly
Usually, the rate of interest is lower than the rate of dividend payable on preference shares and
equity shares. So raising of capital through debentures is less costly.
4. Maintenance of Control
Debenture financing permits the company to raise long-term funds without diluting the present
control.
5. Ability to trade on Equity
The company can trade on equity. In this way, equity shareholders are able to enhance their total
earnings from the company.
6. Remedy against Over Capitalization
Whenever the company feels that it is over capitalized, it can redeem he redeemable debentures.
This will help the company to over come the defects of over capitalization.
7. Debenture is Reliable
The amount derived from debenture issue helps the company to implement expansion
programmes. This helps the company not to depend on fair weather. Sources like public deposits.
8. Market Response
The company can easily dispose of the debentures in the open market because debentures are
having a satisfactory market response.
9. Useful for Conversion
The company may convert different loans into debentures carrying lower rate of interest.

Disadvantages of Debentures:

1. Debentures are not suitable for all Companies

It is not suitable for companies with fluctuating income and companies producing goods, which
have an elastic demand.
2. Permanent Burden
Since the company has to pay interest whether it makes a profit or incurs loss, it becomes a
permanent burden on the financial resources of the company.
3. Requires huge Fixed Assets
Most of the debentures are secured. So companies with less fixed assets cannot raise money
through debentures.
4. No Voting Rights
The debenture holders have no voting rights. This may discourage some investors.
5. Difficulty in Repayment
During depression, the company will find it difficult to repay the principal and fixed interest.
6. Affecting the capacity to raise Loans
If debentures are issued, generally they are secured against all the assets. Because of this, the
company may find it difficult to raise further