Equity Share Capital Advantages And Disadvantages

LONG TERM FINANCING INSTRUMENT:

Equity share capital:

Equity means equal. Equity share is a share that give equal right to the holder.Equity shareholders have to share reward and risk associated with ownership of the company. It is also called as ordinary share capital.Equity shareholders are the owners of the company and who has control over the working of the company.They are paid dividend at the rate recommended by Board of Directors. If there are no profits no dividends will be payable. The equity shareholders will take more risk comapared to preference shareholder.

Features of equity share capital:

An equity source is the permenant ssource of finance. They can be redeemed or refunded only at the time of liquidation.

Equity shareholders

Right to have fixed rate of dividend and right as to repayment of capital in case of liquidation.

Features of Preference share capital:

Companies do not create any charge on assets while issuing of preference shares, still preference shareholders will have prior claim on assets of the company in the event of liquidation.

Not only do they have claim on assets at the time of liquidation, they also have prior claim on profits over equity shareholders.

Most of the preference share dividend is cumulative.It means that all unpaid dividends are carried forward for the next year and paid along with the current years dividend

Preference share capital has limited maturity period, after that the share capital has to be refunded.

Preference shares are issued at a fixed rate of dividend. preference shares does not carry voting rights.

Features:

Debentures are issued at a fixed rate of interest or floating rate f interest

Debenture capital is the cheapest source of finance, but it should be repaid after a specific period.

Debenture can be secured or unsecured. secured debenture is secured by charge on immovable asset of the company where as unsecured debenture without any charge.

In some cases debenture can be converted in to shares by the end of its maturity period at specific ratio mention at the time of agreement.

Debenture holder has priority of claim on income and claim on assets over shareholders. Failure of interest may force bankruptacy.

Advantages:

It is one of the cheapest sources of long term finance

Issue of debentures doen not dilute control

Debenture holder does not participate in surplus profits like equity and preference shareholders