What are the constituents of Equity ?

Equity is own/inside source of funding. It is the money that a promoter (s) or shareholders or both put in a company.

Equity constitutes two things,

1. Share Capital

2. Other Equity

What is Share Capital ?

Share capital is the money raised by  a company on issuing of common or preferred shares to the general public through IPO or QIP or QIB.

How to Calculate Share Capital ?

If a company issue 10 share each of Rs:100 of Face Value Rs:10. 

Share Capital = No of Shares × Value Of Each Share × Face Value

i.e. Share Capital = 10×100×10 = 10,000

What is Other Equity ?

It is the money other than equity (not obtained through issuance of shares).

It contains,

1. Retained Earnings : It represents the undistributed earnings of the company after taxes.

2. General Reserves : It is created without any specific or particular purpose, which can be used for future uncertainties or unexpected liability like fire, contingent liabilities.

3. Capital Reserves : is taken out of the capital profit and is not shared as a dividend to the shareholder. This reserve cannot be created out of the profit earned from the core operation. For example:

• Cash received through selling of assets
• Premium earned through issuance of share and debentures
• Excess on revaluation of assets and liabilities

4. Capital Redemption Reserves (CRR) : When companies engage in redemption of prefence capital or buy-back scheme, the capital base is reduced. To compensate for the reduction CRR is created.

5. Securities Premium : It represents the amount received in excess of the face value during issuance of shares (simply listing gain during IPO).

6. Reserves For Equity Instrument : It represents the cumulative gains or losses arised on the revaluation of equity instruments measured at fair value through other comprehensive income, net of amounts reclassified to retained earnings when those assets have been disposed off.