Explore about Limitations of Equity Shares

What Are Equity Shares?

Equity shares are defined as the long term sources for finance for any company. They are not redeemable and issued for the public of a particular country. The value of equity shares can be expressed in various ways such as book value, face value, par value including many more. 

What Are The Different Types Of Equity Shares?

There are various types of equity shares. Some of them are mentioned below:

• Ordinary Shares

The shares are issued by a private limited company to procure the funds to meet the long term expenses of a particular business. These shares also come with ownership rights to the purchaser. On owning a substantial amount of these shares, people also gain voting rights in the company alongside getting a chance to participate in managerial decisions.

• Preference Equity Shares

They are used by the investors as a source of guarantee of a payment of dividend before the returns are distributed among the different shareholders. But, unlike common equity shares, these do not come with ownership rights of any kind. Owning any amount of these shares will also not give the owner any voting rights. 

• Bonus Shares

The shares are issued based on the retained earnings of a particular business in any financial year. Additionally, the profits are distributed among investors as additional stakes in a company. This is different from the other shares as issuing these does not actually increase the capital of the company, only depicts the additional funds being capitalized.

• Rights Shares 

When a company issues its premium shares to the investors at a discounted price to invite them so that the stake of a business increases is known as right shares. These are issued on a limited time frame to a limited number of people and are only sold till the required finances are raised. 

What Are The Limitations Of Equity Shares?

There can be various limitations in equity shares. They are mentioned below to help the learners. They are as follows:

Limitations according to the company point of view is below:

• Equity shareholders can interfere in the management of the company. Therefore, if the company wants to expand its business and take capital from shareholders, it also has to take into account their suggestions. The shareholders of normal equity shares have voting rights and hence can make or break a managerial decision. 
• They can make the structure of the company rigid as the equity structures are non-redeemable. 
• The shares of equity cannot provide them with any type of tax advantage to the company. 

Limitations according to the point of view of investors are mentioned below. The area is as follows:

• In case the company winds up, equity shareholders are last to get their invested capital back. 
• There is no guarantee of a fixed dividend income. If the company makes losses, so does the shareholder.
• Equity shares are non-reedemable. Therefore the share money can not be taken bcak from the company unless it closes its operations. 

However, equity shares can be sold in the secondary market where both the base price and the profit/ loss is added/ subtracted to fix the cost of the share. This way the shareholder does end up profiting from reselling and in the process, enchashing the equity shares.

What Are The Features Of Equity Shares?

Some of the major salient features of equity shares are mentioned below. They are as follows:

• Equity in the form of ownership security. 
• The equity shares are variable income security.
• Equity shares are non-redeemable. 

Note: 

According to the Companies Amendment Act, 2000 the capital of equity shares can be of two different types. They are as follows:

• Equity capital with the differential rates according to the dividend, voting, etc. 
• Equity capital with equal rights 

Conclusion 

Equity shares are one of the most important aspects of the company. People try to invest in them to get financial security and long term income. Several shareholders come together to get better financial returns when they decide to invest in the equity shares.