complete - LONG TERM SOURCES OF FINANCES Domestic &...

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LONG TERM SOURCES OF FINANCES EQUITY OR THE SHARE CAPITAL EQUITY SHARE CAPITAL: Equity share capital represents the basic or primary source of finance to any company. In terms of funds provided, the equity shares may provide lesser funds than some other source, however, the relevance and importance of equity share capital cannot be undermined in any case. The existence of equity share in the capital structure of a company is a fact of life for the firm's management, and since it is an absolute prerequisite to the creation of a company and an essential ingredient to its future growth, a clear understanding of the inherent characteristics of equity share is necessary. Equity share is a financial asset that represents the ownership in a company. The characteristic of equity shares are a direct consequence of their position in the company's control, income and assets. Some of the basic features of equity shares may be summarized as follows : Rights of Shareholders : The rights of equity shareholders are established and determined by the relevant provisions given in the Companies Act, 1956 and other relevant legal enactments. These rights have different effect in terms of income, risk and control aspects of the relationship between the company and the shareholders. These may be summarized as follows: 1) Voting Right : Holders of equity capital are owners, though loosely, of the firm. The money invested by them does not mature at some future date; they represent permanent capital which is expected to remain with the company indefinitely. Holders of equity capital receive voting rights that permit them to control the affairs of the company. The right to control the affairs of the company is exercised by equity share holders by voting on different 'resolutions' put before them in general meetings of the shareholders. Sections 189 and 190 of the Companies Act, 1956 provide that there may be three types of resolutions: (i) Ordinary Resolutions, (ii) Special Resolutions, and (iii) Resolutions requiring special notice. The equity share holder indicate their approval or disapproval of the managerial actions/proposals by voting on these proposals, on the basis of simple maturity voting (ordinary resolutions) or three-forth maturity (special resolutions). Each shareholder has one vote on an issue by casting one vote for each share held. Although, the shareholders directly control the firm by voting on the resolutions, however, in practice, this 1
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control is somewhat limited. Shareholders who neither appear at the meetings nor give their proxies to someone else to vote do not exercise their right to vote, and those who do vote consequently control the company. Effective control of a company therefore, does not require even 50% ownership of the outstanding equity share capital. So, the existence of voting rights permits the equity shareholder to exercise legal control over the company, but because that right is seldom fully utilized, the effective use of
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complete - LONG TERM SOURCES OF FINANCES Domestic &...

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