Equity Shares

Equity shares are the most common type of shares issued by a company. The legal definition comes from Section 43 of The Companies Act, 2013, which defines an equity share simply as any share that is not a preference share. This negative definition is important because it tells you what equity shares lack: they do not carry any preferential or priority rights.

The two key preferential rights that equity shares do not enjoy are:

• Preferential right to dividend: Preference shareholders get their dividend at a fixed rate before any dividend is paid to equity shareholders.
• Preferential right to repayment of capital: If the company is wound up, preference shareholders get their capital back before equity shareholders receive anything.

Because equity shares lack these preferences, they are also called ordinary shares. The equity shareholders are the real owners of the company. They bear the maximum risk but also stand to gain the most if the company does well.

Dividend on Equity Shares

The dividend paid to equity shareholders is not fixed. It depends entirely on:

• The amount of profits available for distribution after paying dividends to preference shareholders.
• The decision of the company's Board of Directors.

In a year of high profits, the dividend may be high. In a year of low profits, it may be low or even zero. This variable return is the trade-off for the ownership and voting power that equity shares provide.

Types of Equity Share Capital

The equity share capital of a company can be of two kinds:

1. Equity shares with voting rights: This is the standard type. Every equity share normally carries one vote. …