WHAT IS EQUITY SHARE CAPITAL?

INTRODUCTION

Share capital is the amount that is invested by the shareholders in the company. It is a long- term source of capital in which the shareholders receive a portion of company’s ownership. For a company to have share capital it is necessary that its memorandum should state the amount and its division. Shares are majorly of two types namely; equity or ordinary share capital and preference share capital. This article deals with equity share capital, its rights to shareholders and the difference between equity share capital and preference share capital.

EQUITY SHARE CAPITAL

Section 43(a) of the Companies Act, 2013 defines equity share capital as ordinary share capital which is not a preference share capital. In other words, shares which do not enjoy ant preferential rights in the payment or repayment of capital are termed as equity or ordinary shares. The dividend on equity shareholders is not fixed and it may vary from year to year depending upon the amounts of profits available for distribution.

The share capital of a company limited by shares shall be of two kinds namely;

  1. Equity share capital,

  a) with voting rights or

  b) with differential rights as to dividend

2. Preference share capital.

EQUITY SHARE CAPITAL WITH VOTING RIGHTS

Section 47 of the Companies Act, 2013 provides that every member of a company limited by shares and holding equity share capital therein shall have a right to vote on every resolution placed before the company and his voting rights on a poll shall be in proportion to his share in the paid- up equity share capital of the company.

EQUITY SHARE CAPITAL WITH DIFFERENTIAL RIGHTS TO DIVIDEND

Differential rights provide fewer rights to the shareholders. The difference in voting rights can be achieved by reducing the degree of voting power. It is ideal for long-term investors, typically shall investors who seek higher dividend and also not necessarily interested in taking a voting power.

The Companies (Share Capital and Debentures) Rules, 2014 provides that no company whether it is unlisted, listed or a public company limited by share, issue equity shares with differential rights as to dividend voting or otherwise, unless it complies with the provisions as follows-

  1. The articles of association of the company authorizes the issue of shares with differential rights
  2. Issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders, provided that the equity shares of company are listed on a recognised stock exchange and must be approved by the shareholders through postal ballot
  3. The shares with differential rights shall not exceed twenty-six per cent of the total post-issue paid up equity share capital including equity shares with differential rights issued at any point of time
  4. The company must have a consistent track record of distributable profits for the last three years
  5. There has been no default in the filing of financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided that it must issue the shares
  6. The company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of dividend
  7. The company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or state level financial institution or scheduled bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees
  8. The company has not been penalized by Court or Tribunal during the last three years of any office under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contract Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act under which such companies are being regulated by sectoral regulators.

ALTERATION OF CAPITAL

Section 61 of the Act provides that a limited company with a share capital can alter the capital clause of its memorandum of association in any of the following ways-

  1. It may increase its authorised capital by such amount as it thinks expedient
  2. Consolidate and divide the whole or any part of its share capital into shares of larger amount
  3. Convert all and any of its fully paid-up shares into stock or vice versa into any denomination
  4. Sub-divide the whole or any part of its share capital into shares of smaller amount
  5. Cancel those shares which have not been taken up and reduce its capital accordingly

These provisions can be complied with by passing a special resolution in the general meeting of the company and within 30 days alteration notice must be given to the Registrar who will record the same and make necessary changes in the memorandum.

REDUCTION OF SHARE CAPITAL

Section 66 of the Companies Act, 2013 provides reduction of share capital. Under this section a company limited by shares or a guarantee company that has a share capital may reduce its capital in the following manner-

  • Extinguish or reduce the liability on any of its shares in respect of the share capital not paid up or
  • Cancel any paid-up share capital which is lost or is unrepresented by any available assets
  • Pay off any paid-up share capital which is in excess of the wants of the company.

DIFFERENCE BETWEEN EQUITY SHARE CAPITAL AND PERFERENCE CAPITAL

  1. Equity shareholders receive dividend after preference shareholders are paid and preference shareholders receive dividend before the equity shareholders.
  2. Equity shareholders have the right to participate in the management of the company whereas preference shareholders do not enjoy the right to participate in the management of the company.
  3. The dividend on equity shares is paid only after the preference dividend has been paid whereas a preference is given to the preference shareholders over equity shareholders.
  4. Dividend accumulation on equity share capital is cumulative whereas it may be cumulative in preference shares.
  5. No redemption of equity shares except under a scheme involving reduction of capital and redeemable preference shares may be redeemed by the company in preference shares.
  6. Rate of dividend on equity depends upon the amount of profit available and funds requirement of the company while preference shareholders are entitled to fixed rate of dividend.

CONCLUSION

Shareholders contribution in any company plays a vital role and it is the shareholders who are involved in the decision making of the company. A company raises its share capital by issuing shares and it does so in order to expand its business and gain profits. As stated, share capital is of two types majorly, equity share capital and preference share capital and the rights given to the shareholders are different from each other. Preference shareholders are given more rights as compared to the equity shareholders and also at the time of winding they are paid first. The company makes profit from both types of shareholders as they are the important members of any company.

REFERENCES

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