What is meant by equity shares ? Briefly explain its merits



What is meant by equity shares ? Briefly explain its merits.
Explain the merits and demerits of public deposits as a source of finance.


The capital obtained by issue of equity shares is known as equity share capital. It is the important source of obtaining the long term finance. Equity shareholders are the owners of the company. The rate of dividend is paid after meeting all other claims. They have a right to vote and participate in the management of the company. They enjoy the reward as well as bear the risk. Merits:

  1. Equity share capital doesn’t create any charge on the assets of the company.
  2. Voting rights of equity shareholders assure democratic control over management of the company.
  3. Equity share capital is to be repaid only at the time of winding up of a company and hence it is permanent capital of the business.
  4. There is no burden on the company in respect of dividend payable to equity shareholders because it is not compulsory to pay dividend.
  5. Equity shares are generally suitable for those investors who are willing to undertake risk for higher returns.
  6. Equity share capital increases credit worthiness of the company and also provides confidence to prospective loan providers.
    Public deposits have following merits and demerits :
    (a) No security : Public deposits are unsecured so the assets of the company are free to be used as mortgage in future. This increases credit worthiness of the company.
    (b) Economical : Obtaining public deposits involves very less cost companies don’t need to spend on prospectus and underwriter commission. The interest paid on public deposits is less than the interest paid on other borrowed funds.
    © Simple procedure : There are less legal formalities for issuing and obtaining funds from public deposits. The companies do not take permission from the controller of capital and there is no need to get listed in any stock exchange market as in the case of shares and debentures.
    Demerits of public deposits : .
    (a) Limited amount: The amount of funds that can raised by way of public deposits is limited because of legal restrictions. Public deposits can’t exceed 25% of share capital and free reserves.
    (b) Uncertainty : Public deposits is an uncertain and unreliable source of finance. During depressed market conditions in the capital market, depositors may not respond. Also deposits may be withdrawn whenever the financial position of the company is not stable.
    © Suitable to meet short-term financial needs : A company cannot depend upon public deposits for a long term financing requirement as the maturity period of public deposit is between six months to three years.