demerit of equity shares

dilution of control: issue of additional equity shares dilutes the voting power and earnign of the existing equity shareholders

The demerits/limitations of Equity Share Capital can be explained as follows:

Dilution in control implies decline in the shareholder's percentage of control in a company as a result of new/additional issue of shares. It also results in financial dilution i.e. low earnings per share (EPS) of existing shareholders as more shareholders seek share in the earnings of the company. 

Equity shareholders have a claim over the residual proceeds of the company. In other words, in the event of winding up they are the last to be paid off after settling the claims of creditors and other external liabilities. In case the funds are insufficient to repay or settle external liabilities, equity shareholders are not paid off any thing.

Also, the returns on equity shares vary with the profits earned by a company during the years. If in some particular year, the company has suffered losses or has earned insufficient profits, in that case, equity shareholders' might receive lower dividends or no dividends at all.

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  • equity shares get flutuating returns
  • Cost of raising equity shares is more then other funds
  • dilutes the voting power
  • More formalities and procedural delays
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