Equity capital
Also written Equity share capital · Owners' capital
Money put into a company by its owners — promoters and shareholders — in return for ownership, votes and a claim on residual profits. It is never repaid and ranks last in a winding up.
In plain language
A business can be funded in two ways. Somebody can lend it money, or somebody can own a piece of it. Equity capital is the second.
The first equity always comes from the promoters, who set the company up and bring in the risk capital. Later, outside investors can contribute equity by buying equity shares, and they become shareholders alongside the promoters.
What the shareholder gets is ownership: a vote, a share of whatever profit is left after everyone else is paid, and the hope that the shares will be worth more later. What the shareholder gives up is certainty. There is no fixed return, no maturity date, no security over the company's assets, and in a liquidation the shareholder is paid last.
How it works
The workbook describes equity capital by its features:
| Feature | What it means |
|---|---|
| Limited liability | If creditors cannot recover their dues, shareholders are not asked to pay up; liability is limited to what they contributed or agreed to pay |
| Ownership | Shareholders own the company in proportion to their shares — 10 lakh of 1 crore shares is 10 percent |
| Voting | Each equity share carries one vote; major decisions need resolutions passed by majority |
| Residual profits | What remains after all expenses and provisions belongs to shareholders, usually paid as dividend |
| Liquidity | Not from the company, but from the secondary market after listing |
| Perpetuity | Cannot be redeemed; the company has no obligation to repay — except a buy-back, after which the shares are extinguished |
| Uncertain pay-outs | No guarantee of dividend or capital appreciation |
The risks are the mirror image: no fixed return, no fixed tenor, liquidity risk (the bid-ask spread, or no exit at all if unlisted), and no collateral — cash and assets are first applied to lenders and creditors, and dividends come only after expenses, interest and taxes.
On the balance sheet, both equity and debt sit on the liabilities side as sources of funds. The difference is cost: debt has a cost fixed when it is raised; the cost of equity varies with the company's earnings.
A worked example
The workbook's own illustration: issued and paid-up capital of Rs 10 crore, made up of 1 crore shares of Rs 10. An investor holding 10 lakh shares owns 10 percent of the company and casts 10 lakh votes.
Now the ranking, with illustrative figures. The company fails. Its assets sell for Rs 62 crore. It owes Rs 45 crore to secured lenders and Rs 12 crore to trade creditors.
Available for distribution Rs 62 crore
Less: lenders and creditors − Rs 57 crore
Left for equity shareholders Rs 5 crore
Per share = Rs 5 crore ÷ 1 crore = Rs 5.00
The 10 percent investor receives Rs 50 lakh back on shares with a face value of Rs 1 crore — and nothing more is asked of him, because of limited liability. Had the assets fetched only Rs 50 crore, shareholders would receive nothing, and the lenders' Rs 7 crore shortfall would still not become the shareholders' debt.
In a good year the same structure works the other way: after interest to lenders is paid, every rupee of remaining profit belongs to the equity shareholders — which is precisely what they took the risk for.
Why NISM asks about it
Chapter 1 (Introduction to Securities) sets equity against debt on contributors, time period, cost and rights, and lists the features in 1.2. Chapter 2 develops the investor categories (2.1), the rights (2.2) and the risks (2.3). Chapter 1's sample questions include "________ capital is for perpetuity from the point of view of the company" (equity) and the returns question (dividend and capital appreciation).
Common exam traps
- Equity is perpetual; debt has a maturity. A buy-back is a special situation, not repayment — the bought-back shares are extinguished.
- Limited liability protects the shareholder, not the creditor. Shareholders are not asked to pay creditors' shortfalls beyond what they contributed or agreed to pay.
- Liquidity comes from the secondary market, not from the company. A secondary market sale does not change the company's capital structure.
- Shareholders rank last — after lenders and creditors in a liquidation, and after expenses, interest and taxes for dividends.
- Both debt and equity are sources of funds on the liabilities side. Do not mark equity as an asset of the company.
- Preference shares are part of the equity family but lack ordinary voting rights and are treated in the workbook as a hybrid.
Where this is taught
- Series II-A · Chapter 1: Introduction to Securitiesintroduced here
- Series II-B · Chapter 1: Introduction to Securitiesintroduced here
Related terms
- BuybackA company purchasing its own shares out of reserves and extinguishing them, reducing share capital and raising earnings per share for the shareholders who remain.
- Differential Voting RightsEquity shares that carry less than one vote each, letting a company raise capital without diluting control — and letting an investor who does not want the vote buy the same economics at a discount.
- Debt capitalMoney a company borrows — through debentures, bonds, commercial paper or bank loans — which must pay interest and be repaid on maturity, whether or not the company is doing well.
- Limited liabilityThe rule that an equity shareholder's exposure to a company's debts is capped at what they invested — creditors who cannot recover their dues from the company cannot come after the shareholder personally.
- Paid-up capitalThe part of the issued capital that shareholders have actually paid for — issued capital less the calls still outstanding on partly paid shares.
- Secondary marketThe market where securities already issued are traded between investors — the money goes to the selling investor, not to the company, and the issuer's capital is unchanged.
- ADR, GDR and IDRDepository receipts represent shares of a company in one country but trade on an exchange in another — American inside the US, Global outside it, Indian for foreign shares listed here.
- Authorised capitalThe maximum amount of share capital a company is allowed to issue, fixed in its Memorandum of Association — a ceiling on what can be created, not money the company has.
- Convertible debenturesDebentures that turn into equity shares on terms fixed at issue — the investor draws a coupon until conversion, and the company settles the debt in shares instead of cash.
- Foreign Currency Convertible BondA bond issued by an Indian company to investors in foreign currency, paying interest and principal in that currency and convertible into ordinary shares at a price usually set above the market price.
- Anti-dilution rightsA special shareholder right to buy a proportional number of new shares when a company issues fresh securities, so the shareholder's existing percentage ownership does not shrink.
- Closely held companyA company whose equity is held only by promoters and a handful of other investors, with no shares offered to the public — it stays free of the disclosure duties a listed company carries.
- Hybrid instrumentA security that combines features of both debt and equity in one instrument — the workbook's two examples are convertible debentures and preference shares.
- Residual claimThe equity shareholder's place at the back of the queue: entitled only to profits and assets left after government, lenders, employees and preference shareholders have been paid.