2. EQUITY SHARES
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Equity shares is the most important source of raising long term capital by a company . Equity shares
represent the ownership of a company and thus capital raised by issue of such shares is known as
ownership capital or owner’s funds. Equity share capital is a prerequisite to the creation of a company.
Equity shareholders do not get a fixed dividend but are paid on the basis of earning by the company.
They are referred to as residual owners since they receive what is left after all other claims on the
company’s income and assets have been settled. They enjoy the reward as well as bear the risk of
ownership. Their liability, however is limited to the extent of capital invested by them in the company.
Further, through their right to vote, these shareholders have right to participate in the management of
the company.
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ypes of equity shares
Authorized Share Capital
Issued Share Capital
Subscribed Share Capital
Paid Up Capital
Right Share
Bonus Share
Sweat Equity Share
3. PREFERENCE SHARES
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Preference shares are the shares which promise the holder a fixed dividend, whose payment takes priority
over that of Equity share dividends. Capital raised by the issue of preference shares is called preference share
capital.
The preference shareholders are in superior position over equity shareholders in two ways: first,(1) receiving
a fixed rate of dividend, out of the profits of the company, before any dividend is declared for equity
shareholder and second,(2) receiving their capital after the claims of the company’s creditors have been settled,
at the time of liquidation. In short, the preference shareholders have a preferential claim over dividend and
repayment of capital as compared to equity shareholders.
Dividends are payable only at the discretion of the directors and only out of profit after tax, to that extent,
these resemble equity shares. Preference resemble debentures as both bear fixed rate of return to the holder.
Thus, preference shares have some characteristics of both equity shares and debentures.
Preference shareholders generally do not enjoy any voting rights. In certain cases, holders of preference
shares may claim voting rights if the dividends are not paid for two years or more on cumulative preference
shares and three years or more on non-cumulative preference shares. But what are cumulative and non-
cumulative preference shares? They are classified below:
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ypes of preference Shares
Cumulative and Non-Cumulative
Participating and Non-Participating
Convertible and Non-Convertible
4. DEBENTURES
Debentures refer to long-term debt instruments issued by a government or corporation to meet its
financial requirements. In return, investors are compensated with an interest income for being a
creditor to the issuer.
They are usually an unsecured form of borrowing from the public and have a lengthy tenure, usually
exceeding ten years.
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A debenture is essentially a long-term loan that a corporate or government raises from the public for
capital requirements. For example, a government raising funds to construct roads for the public.
Debenture holders are the creditors of the issuing company, unlike a shareholder who is the owner.
Just like bondholders, debenture holders also earn an interest income for investing in the debt
instrument. The coupon rates or interest rates are usually fixed unless when they are of the floating
kind. A fixed rate of interest cushions against market fluctuations, making the investment less risky.
Debentures do not allow a claim over the issuer’s assets as they are largely unsecured debt
instruments. The absence of collateral is offset by stable, low risk and better earnings. Also, a
financially stable company with a reliable credit rating attracts investors as it reflects investment’s
safety. Besides, with floating interest rates, earnings become better when rates improve.
Types of debentures
Secured and Non-secured
Convertible and Non-Convertible
Perpetual
Fixed Charge or Floating Charge