An Equity represents the ownership of a company. Its literal meaning is quality of being fair and impartial. In terms of finance equity is the ownership of a company. The different types of companies are private, publicly owned, unlisted or listed. If a person owns an equity then he/she is the owner of the company. The ownership is partial and limited in nature. If a person owns a large stake in a company then she/he has more controlling power in the company. A person who owns a small stake in a company is also know as a minority stake holder.
Minority share holders
The bulk (in terms of numbers) of investors in a company are minority share holders. They have invested their savings in the hope of greater returns. Minority share holders does not enjoy the rights when it comes to taking the key decisions like appointing or firing a CEO, Director, General Manager, CFO etc or other such important designations. However they enjoy equal shares in profits of the company and no liability, if the company or its employees carry out activity which goes against the law, then the onus is on the promoters or the individual involved. The majority stakeholders or founders of the company are also known as Promoters or Promoter Group.
In India, companies are governed by the Companies Act 2013. The definition of a company its establishment and functioning are all specified in the act. The nodal ministry in India that regulates the compnaies and its affairs as per the related acts & articles mentioned above is the Ministry of Corporate Affairs.
How does companies issue Equity?
Firstly the companies are registered either in the Registrar office or the Ministry of Coporate Affairs. Secondly as and when the company wants to raise funds it will raise them by issuing securities. The securities are in the form of Shares or Bonds ( bonds also known as debt instruments). The shares are nothing but Equity. As a result, we can come to a conclusion that securities (shares, bonds) are fund raising arrangements. The company can raise funds for meeting its expenses, paying salaries, pensions as well as to start a new line of business. The securities issued by a company in India is governed by the Securities and Contract Regulation Act 1956. There are some regulators of the securities (shares and bonds) market in India. We will discuss about the regulator in the sections below.
Regulators of the Equity (Securities) market in India?
The regulatory authority that deals with the conduct of issuer of securities and the rights of the investors are as follows.
- SEBI – Securities and Exchange Board of India – SEBI Act 1992 – Regulator of Securities Market
- RBI – Reserve Bank of India – RBI Act 1934 – Regulator of Banking
- IRDAI – Insurance Regulatory Development Authority of India – IRDA Act 1999 – Regulator of Insurance
- PFRDA – Pension Fund Regulatory Devlopment Authority – PFRDA Act 2013 – Regulator of Pension funds
SCORES by SEBI is the portal for lodging the complaints of fraud in the securities market. In case of a serious fraud with many institutions, multiple mechanisms are there such as the company law tribunals like NCLT and NCLAT
How to Invest in Equities in India?
Firstly one should save an asset in order to invest. The flowchart below will help you in understanding how an investor can invest in the Indian Equities market. The procedure for NRI and NRO categories are different than the resident individual Indian. The documentation for foreign nationals who would like to invest in Indian markets is also very different. Meanwhile, we are going to discuss the flow Resident Indian Nationals.
Entities and their functions
The first entity that we come across is the Exchange. Exchange is a place where we will be able to interchange currency with Security ( Equity or Share & Bonds ).
A Broker is an entity which is registered with the Exchange as a Trading Member. Brokers are also registered with the Depositories as a Dipository Participant. As a result, Brokers play a dual role of connecting Depositories and Exchange. Finally, two types of Brokers operate in India, they are full brokers and discount brokers. Brokers are a bridge between investors or participants and the Exchange and Depositories.
|Discount Broker||Full Broker|
|Angel Broking||SBI Securities|
|5 Paisa||Bank of India Securities|
Finally, we have one more entity that needs a mention in all of this – Clearing and Settlement Agency. To sum it up, we have an Investor => Broker => Exchange => Depository => Clearning and Settlement. This entire process takes upto Trading day +2 days and is done electronically.
As an Investor, a person should know all these details before starting to trade or invest. In this article we so far we have understood what is the meaning of equity. What is the way through which an investor who is a resident Indian can invest in equity. Last but not the least we also came to know about the regulations, entities and process through which we can interchange the assets.
In the next article our obective is to better our understanding of the equities market. If you like our content then please shower your love by commenting and sharing the articles we craft for you, in a relatively simple language so that it becomes easy for you to understand the fundamentals of the subject.
- Financial Planner