Q.What is 'equity share'? Explain the features of equity shares. OR Draft a letter of allotment of shares.

An equity share is the basic ownership share of a company; its features include ownership and voting rights, variable dividend, permanent and residual capital, higher risk, and rights to bonus and rights shares.

Meaning of equity share

An equity share (also called an ordinary share) is a share that does not carry any preferential right as to dividend or repayment of capital. Equity shareholders are the real owners of the company. They contribute the main ownership (permanent) capital, bear the greatest risk, and enjoy control over the company through their voting rights. They receive dividend only after preference shareholders are paid, and the rate is not fixed.

Features of equity shares

1. Ownership: Equity shareholders are the true owners of the company and collectively control it.
2. Voting rights: They enjoy voting rights in proportion to their shareholding and elect the directors, thereby controlling management.
3. Variable (fluctuating) dividend: They have no fixed rate of dividend; the dividend depends on the profits earned and the Board's recommendation, so it may be high, low or nil in a year.
4. Permanent capital: Equity capital is not repaid during the life of the company; it is returned only at the time of winding up. Thus it is permanent capital.
5. Residual claim: Equity shareholders have a residual right. In dividends they are paid after preference shareholders, and on winding up their capital is repaid last, after all creditors and preference shareholders.
6. Higher risk and higher reward: They bear the maximum risk since their return is uncertain; but in prosperous years they may earn a high dividend and benefit from a rise in share value.
7. Rights and bonus shares: Existing equity shareholders get the first right to buy new (rights) shares and are entitled to bonus shares issued out of reserves.
8. Limited liability: Their liability is limited to the unpaid amount, if any, on the shares they hold.

Because equity shares combine ownership, control and a variable, residual return, they form the foundation of a company's capital.

OR — Specimen: Letter of Allotment of Shares

VIOLET LIMITED

Registered Office: 120, M. G. Road, Pune - 411 001

Ref. No.: SH/ALT/2020/301

Date: 12th February, 2020

Mr. Prakash V. More

7, Model Colony,

Pune - 411 016

Dear Sir,

Sub: Allotment of equity shares

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