TABLE OF CONTENTS
* Forms of equity
* Equity and equity-related instruments
* Equity Shares
* Preference Shares
* Differential Shares
* Mutual Funds
* Euro Issues
* Equity Derivatives
Equity implies a share in the ownership of the business. Raising money in the form of issue of equity has its own advantages in that the business does not guarantee fixed returns to the investors. Neither is it obliged to return the invested amount at pre-determined points of time. Absence of such fixed commitments provides flexibility to a business in carrying out its operations in the desired manner. Additionally, raising funds through equity also provides the business the flexibility of undertaking future investments through debt from banks and FIs. This is because these institutions view the high proportion of equity favorably as the investors in equity (being owners) only have a residual claim on the assets of the business after meeting the claims of lenders (in the event of bankruptcy). However, in return such equity holders (especially large investors or institutions) may seek a greater say in the management through nominees on the Board of Directors. Further, the returns to the equity holders would arise in the form of dividend (out of the distributable profits) and capital gain through enhanced value of their investment due to the current performance and future prospects of the business. Thus, investors in equity are willing to be subject to higher levels of risk in return for prospects of high level of returns. The main characteristics of an equity instrument are thus as follows: * Can be floated at face value or at a premium based on the valuation of the company and the portion of the equity offered for investment. * No guarantee of fixed returns to the investors.
* Carries residual claim on the assets of the firm in the event of bankruptcy. * Limited liability for the investor or promoter to the extent of his investment (For businesses incorporated as a limited company under the Companies Act). * High risk, return characteristics.
FORMS OF EQUITY
* Regardless of its form, equity represents an ownership interest in a business entity. This ownership interest is often described as a residual interest because the claims of the equity owners on the assets of the enterprise are subordinate to all other claims including the claims of all secured creditors, general creditors and subordinated creditors. * The principal forms of equity are Common stock, partnership interests and proprietorship interests.
* Commonly referred to as common stock or ordinary shares, these represent proportionate ownership of a company. * The common stock of a company is detailed in its certificate of incorporation which states the number and types of equal units (shares) into which the stock is divided. * The holder of a share is part owner of the assets and earnings of the corporation. * The advantages of equity shares are Capital appreciation, Limited liability, Free tradability, Tax advantages (certain cases) & Hedge against inflation. Rights of Equity Shareholders
* New equity instrument introduced in the Companies (Amendment) Ordinance, 1998. Newly inserted Section-79A of the Companies Act, 1956 allows issue of sweat equity. * It should be issued out of a class of equity shares already issued by the company, thus, it is a part of equity capital. * The definition of sweat equity has two different dimensions:
TYPES OF SWEAT EQUITY
1) The issue of sweat equity may be priced at a discount to the preferential pricing or at a discount to face value. The issue of sweat equity falls in the category of preferential issue under section 81(1A) of the Companies Act, 1956.
2) The second type of sweat equity can be issued at par or above par,...
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