## Equity Capital (Owner's Capital)
Long-term financial needs are met through two main routes: Share Capital (equity + preference) and Debt. This lesson covers equity share capital.
A public limited company can raise funds from promoters or the public by issuing equity shares.
### Features of Equity Capital
| Feature | Explanation |
|---|---|
| Permanent capital | A long-term, non-redeemable source of finance. |
| Ownership & risk | Equity shareholders are the owners and bear the highest risk. |
| Dividend | Paid only after all other claims (debt, preference) are settled. |
| Claim on assets | On liquidation, equity holders have the last (residual) claim. |
| Cost of capital | Highest, because shareholders demand higher returns for higher risk. |
| Security for loans | A strong equity base helps the firm secure debt financing. |
| Types | New Issue, Rights Issue, Bonus Shares, Sweat Equity. |
### Advantages of Raising Funds Through Equity Shares
| Advantage | Explanation |
|---|---|
| Permanent source of finance | Not redeemable — no cash-outflow liability to repay investors; shares trade freely in the market. |
| Enhances borrowing power | Strengthens the financial base, making it easier to raise further debt; can lift EPS and share price. |
| No legal obligation for dividends | Unlike debt interest, dividends are not legally compulsory — can be reduced/skipped in tough times. |
| Option to raise more capital | Can issue more shares via a Rights Issue to existing shareholders. |
### Disadvantages of Raising Funds Through Equity Shares
| Disadvantage | Explanation |
|---|---|
| Higher risk for investors | Dividends and capital gains are uncertain. |
| Earnings dilution | New shares reduce EPS unless profits rise proportionately. |
| Loss of ownership & control | New issuance dilutes existing shareholders' control. |
### Key takeaway
Equity is the safest source for the company (no repayment obligation, no compulsory dividend) but the most expensive source of capital (highest required return) and it dilutes control and EPS — the mirror image of debt.