Ordinary Share Capital: Features, advantages and disadvantages

Features

• Ordinary shares are variable income securities.
• Ordinary share dividend is not an allowable deduction for tax purposes.
• It is an external source of fund
• Providers of this capital get ownership and voting rights
• It is a permanent source of funds.
• Ordinary shareholders are paid dividend after the income.
• Claims of other providers of capital have been satisfied.
• It is provided without conditions.
• It’s the most important single source of fund to the company.
• It lowers the firms gearing and financial risks.
• Providers of this capital participate in the supernormal earnings of the firm.
• It can only be raised by listed company’s i.e. companies to that have fulfilled the gap market authority listing requirements.
• The company is not under any legal obligation to pay dividend.
• In the event of liquidation, ordinary shareholders have a residual claim on the company’s assets.

 

Advantages of Ordinary Share Capital (From the COS. Point of view)

1. It is a permanent source of funds.

It’s available for use by the company as long as the company is a going com.

2. It is provided without condition

It’s therefore a flexible source of funds.

3. It is not secured.

It can be raised even when the firm does not have sufficient assets to pledge as collateral/security.

4. The company is under no legal obligation to pay dividend.

Non-payment of the dividend cannot lead to liquidation of the company.

5. It reduces the company’s gearing and financial risk.

It therefore enhances the company’s ability to raise more funds.

6. Providers of this capital contribute valuable idea towards the running of the company during the AGM.
7. It can be raised in large amounts and can therefore be invested in long term project that involve huge initial cash outlay.
8. The company is able to get feedback on the opinion of the investing public. A continued decline in the market raise of the shares may be an indication that the investing public is not happy with the current management team.
9. There are no cash outflows associated with this capital since it is not redeemable.
10. It enhances corporate governance. This capital can only be raised by listed companies which have to practice corporation governance guidelines developed by the capital market authority.

 

Disadvantages of Ordinary Share Capital (To the Company)

1. It involves heavy floatation costs.

It’s therefore more expensive to raise when compared to longer term debt finance.

2. Ordinary share dividend is not an allowable deduction for tax purposes.

Use of ordinary share capital does not therefore provide the company with tax savings.

3. It is not accessible to all companies.

It can only be raised by listed firms.

4. It leads to dilution of ownership and control of the firm by the existing shareholder.

This is because providers of this capital get ownership and voting rights.

5. Providers of this capital participate in the supernormal earnings of the firm.

This reduces the common shareholder’s earnings.

6. It may lead to dilution of the firm’s earnings per share.