📘 2.1 Investors in Equity Shares
📌 Definition:
Equity capital is raised by companies to meet long-term funding needs without repayment liability. In return, investors receive proportional ownership, voting rights, and the opportunity to share in company growth through capital appreciation and dividends.
Equity capital can be raised from three major categories of investors. Each group has different expectations in terms of control, risk appetite, and return potential:
🧑💼 Promoters
- Founders who contribute initial capital
- Hold majority control in early stages
- Usually have the highest risk exposure
- May invite other investors as the business scales
Example: A startup founder brings in ₹10 lakh to launch a new venture.
🏦 Institutional Investors
- Includes VCs, mutual funds, banks, FII
- Professionally evaluate risk-return potential
- May enter at various stages of company growth
- SEBI mandates mutual funds to promote corporate governance
Example: A venture capital fund invests ₹5 crore in a Series A funding round.
🌍 Public Investors
- Retail and HNI investors participate via IPO
- Typically passive, focus on return not control
- Require high transparency and compliance from the company
- Public listing shifts a company from private to public ownership
Example: An IPO allows retail investors to buy shares of a growing company at ₹100 each.
📘 2.2 Rights of a Shareholder
📌 Definition:
Equity shareholders are part-owners of the company. In return for their investment, they are granted rights such as voting power, participation in profits, and access to company information. These rights form the foundation of shareholder empowerment and protection.
Shareholders enjoy various legal and financial rights that differentiate them from debt holders. Below are the key rights granted to equity shareholders:
🗳️ Ownership & Voting Rights
- Right to vote on resolutions and policies in general meetings
- Each share usually carries one vote
- Right to attend the Annual General Meeting (AGM)
- Participation in major company decisions
💰 Right to Dividend
- Entitlement to share company profits if declared as dividends
- Dividend amount is based on shareholding and face value
- No fixed return – depends on profitability
🔁 Right to Transfer Ownership
- Shares can be sold in the secondary market
- Ownership is perpetual; company doesn’t repay capital
- Gives exit flexibility to shareholders
📄 Other Legal Rights
- Right to inspect company documents
- Right to legal action in case of fraud or mismanagement
- Anti-dilution rights (to maintain ownership % during new issues)
Example: A shareholder owning 1,000 shares of a listed company receives ₹2 per share as dividend if the board declares a 20% dividend on ₹10 face value. They may also attend the AGM and vote on future merger proposals.
📘 2.3 Risks in Equity Investing
📌 Concept:
Equity investing offers higher return potential, but also exposes investors to various risks such as market volatility, no fixed income, and lack of repayment security. Understanding these risks helps in setting realistic return expectations and planning exit strategies.
Here are the major risks equity shareholders face when investing in company shares:
📉 No Fixed Return
- No guaranteed dividend or fixed interest
- Returns depend on company profits and board decisions
- Stock price may fall due to poor performance or market downturns
- Capital loss is possible
⏳ No Fixed Tenure
- Equity shares are perpetual
- Company is not obligated to repay invested capital
- Exit is possible only by selling in the market
💧 Liquidity Risk
- Shares may not sell at desired price (bid-ask spread)
- Unlisted or illiquid stocks may be hard to sell
- Sale may result in lower than fair value
🔓 No Collateral Security
- Equity capital is unsecured
- Creditors are paid first in case of liquidation
- Dividend paid only after tax, expenses, and interest
Example: An investor buys 500 shares of a startup at ₹100 each expecting high growth. Due to unexpected losses, the share drops to ₹40, no dividend is declared, and liquidity is low. This leads to a 60% capital erosion with no income return.
📘 2.4 Equity Terminology
📌 Overview:
Equity shares carry various financial definitions and classifications that help track how capital is raised, recorded, and reported. Understanding these terms is critical for interpreting a company’s financial statements and ownership structure.
🔹 Face Value
Base denomination of each share set by the company. Used to calculate dividends.
Example: ₹10 face value × 1 lakh shares = ₹10 lakh capital
🔹 Share Premium
Amount received over face value. Reflects investor confidence and market expectations.
Example: Issued at ₹50 with ₹10 face value → Premium = ₹40
🔹 Authorised Capital
Maximum share capital a company is legally allowed to issue, as stated in its MoA.
🔹 Issued Capital
Portion of authorised capital that has been offered to investors.
🔹 Paid-up Capital
Capital that has been fully paid by shareholders. Can be paid in tranches.
Note: Paid-up ≤ Issued
🔹 Outstanding Shares
Shares currently held by all investors including promoters and institutions.
Formula: Paid-up Capital ÷ Face Value
🔹 Fully Paid-up Shares
Shares for which the entire face value is already paid. No further liability exists.
🔹 Partly Paid-up Shares
Shares for which a part of the face value remains unpaid. The company can call for the balance.
📊 Example Breakdown:
A company sets its authorised capital as ₹20 crore and issues ₹10 crore worth of ₹10 shares:
- Before Issue: Authorised = ₹20 crore
- After Allotment: Issued = ₹10 crore, Paid-up = ₹5 crore
- After 6 Months: Paid-up = ₹10 crore
- Outstanding Shares: ₹10 crore ÷ ₹10 = 1 crore shares
💡 Key Points:
- ✅ Paid-up Capital ≤ Issued Capital
- ✅ Issued Capital ≤ Authorised Capital
- 📌 Only paid-up capital is reflected in balance sheet
📘 2.5 Corporate Actions
📌 Definition:
Corporate actions are significant events taken by a company that result in change to its securities—either equity or debt. These are approved by the board of directors and often require shareholder consent. They impact shareholders’ rights, returns, and the capital structure.
Below are the most common corporate actions impacting equity shareholders:
💰 Dividend
- Declared when a company has sufficient profits
- May be Final (year-end) or Interim (mid-year)
- SEBI mandates dividend be shown in ₹ per share
- Dividend Yield = Dividend ÷ Market Price × 100
Example: 60% on ₹2 face value = ₹1.2 dividend; Market price ₹80 → Yield = 1.5%
🔄 Buyback of Shares
- Company repurchases shares from existing investors
- Usually at a price higher than market price
- Reduces outstanding shares and increases EPS
- Regulated by SEBI (Buyback of Securities) Rules
Effect: Positive for EPS, Reduces capital base
🎁 Bonus Issue
- Free shares issued from company’s reserves
- No cash outflow or payment required by shareholders
- Increases total number of shares but not total value
Example: 1:2 Bonus → 1 new share for every 2 held
🔢 Stock Split & Consolidation
- Split: Face value reduced, number of shares increases
- Consolidation: Face value increased, shares grouped
- Value of holdings remains unchanged
Example (Split): 100 shares of ₹10 → 200 shares of ₹5
Example (Consolidation): 100 shares of ₹2 → 20 shares of ₹10
📘 2.6 Preference Shares
📌 Definition:
Preference shares are a special class of equity that provides preferential rights over ordinary shares in terms of dividend and capital repayment. However, they generally do not carry voting rights unless under specific circumstances.
Companies may issue preference shares to investors who want regular income with lower risk than equity shares. These shares come with specific rights as mentioned during their issue.
✅ Key Features of Preference Shares
- Priority over equity shareholders in dividend payout
- Priority in capital repayment during liquidation
- Fixed dividend rate (if declared)
- Can be cumulative (dividends carried forward) or participating (share in residual profit)
⚠️ Limitations of Preference Shares
- Do not usually carry voting rights
- Dividend paid only if company has sufficient profits
- Limited capital appreciation
- Not secured by company assets
Live Example: A company issues 5 lakh cumulative preference shares with ₹100 face value at 10% dividend. If it misses payment in Year 1, and profits return in Year 2, it must pay ₹10/share × 2 years = ₹20 per share.
📊 Preference Shares vs Debentures
| Basis | Preference Shares | Debentures |
|---|---|---|
| Ownership | Shareholder (part-owner) | Creditor |
| Security | Not secured | Usually secured |
| Dividend/Interest | Paid from profits | Paid before tax (as expense) |
| Voting Rights | No (except in special cases) | No |
| Capital Gain | Limited | None |
📘 2.7 Rights Issue of Shares
📌 Definition:
A rights issue is an offer made by a company to its existing shareholders to purchase additional shares at a discounted price, in proportion to their current holdings. This helps raise capital while preserving ownership structure if shareholders participate.
Rights issues are governed by SEBI and Companies Act provisions. They are designed to prevent dilution of ownership and give existing investors the first right to buy new shares.
🔁 Rights Issue Process
- 📢 Company plans to raise capital
- 📊 Determines ratio (e.g. 1:1) and price
- 📬 Offers shares to existing shareholders
- ✅ Investor accepts and pays → receives new shares
- ❌ Investor ignores → holding % gets diluted
Example: ABC Ltd. has 10 lakh shares at ₹10 face value = ₹1 crore capital. It issues another 10 lakh shares in a 1:1 rights issue. Each current shareholder can buy one additional share. If a shareholder doesn’t participate, their ownership is diluted by 50%. If they do, they maintain their percentage.
💡 Key Points:
- 📌 Participation in rights issue is voluntary
- 🟢 Helps raise funds without issuing to outsiders
- ⚠️ Non-participation leads to dilution of ownership
- 📏 Ratio and price are decided by board and disclosed upfront
📘 2.8 Preferential Issue
📌 Definition:
A preferential issue is the allotment of equity shares by a company to selected individuals or entities (such as strategic investors or promoters) at a pre-determined price. This issue is governed by SEBI guidelines and requires shareholder approval due to dilution of existing holdings.
It is typically used for bringing in strategic partnerships, raising capital quickly, or giving control to a key investor without a public issue.
🔄 Preferential Issue Process
- 📊 Company identifies strategic investor(s)
- 💰 Issue price is decided (as per SEBI pricing norms)
- 📝 Board proposes resolution + terms of issue
- 🗳️ Shareholders approve via special resolution
- 📥 Shares allotted to selected entity (not open to public)
⚖️ Key Characteristics:
- ✅ Faster than public or rights issue
- ✅ Can help bring in strategic control/investment
- ⚠️ Leads to dilution of existing shareholder rights
- 📏 Price must comply with SEBI (ICDR) Regulations
Example: XYZ Ltd. has 1 crore outstanding shares. It issues 25 lakh new shares to a private investor at ₹120 each through a preferential issue. This increases total share capital and reduces the percentage ownership of existing shareholders.
Impact:
- Company gets targeted capital quickly
- Existing investors’ proportional holding drops
