Sources of Corporate Finance — Secretarial Practice STD 12 Commerce / Arts — Question

• Equity shares are irredeemable shares. It is permanent capital.
• The amount received from equity shares is not refunded by the company during its lifetime.
• Equity shares become redeemable/refundable only in the event of the winding-up of the company or the company decides to buy back shares.
• Equity shareholders provide long-term and permanent capital to the company.

(ii) Fluctuating dividend:

• Equity shares do not have a fixed rate of dividend.
• The rate of dividend depends upon the amount of profit earned by the company.
• If a company earns more profit, the dividend is paid at a higher rate.
• If there is insufficient profit, the Board of Directors may postpone the payment of dividends.
• The shareholders cannot compel them to declare and pay the dividend.
• The dividend is thus, always uncertain and fluctuating.
• The income of equity shares is uncertain and irregular.

(iii) Controlling power:

• The control of a company vests in the hands of equity shareholders.
• They are often described as real masters of the company as they enjoy exclusive voting rights.
• Equity shareholders may exercise their voting right by proxies, without attending the meeting in person.
• The Act provides the right to cast vote in proportion to the number of shareholdings.
• They participate in the management of the company.
• They elect their representatives called the Board of Directors for management of the company.

(iv) Market value:

• Market value fluctuates according to the demand and supply of shares.
• The demand and supply of equity shares depend on profits earned and dividends declared.
• When a company earns huge profits, the market value of shares increases.
• When it incurs loss the market value of shares decreases.
• There are frequent fluctuations in the market value of shares in comparison to other securities.
• Equity shares are more appealing to speculators.

(v) Capital Appreciation:

• Share capital appreciation takes place when the market value of a sharp increase in the share market.
• The profitability and prosperity of the company enhance the reputation of the company in the share market and thus, facilitates appreciation of the market value of equity shares.