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Equity Interest

Updated on January 4, 2024
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Equity Interest Meaning

Equity Interest is the percentage of ownership rights an individual, company, or any other form of organization holds in one company. It gives the holder voting right in that company and is said to be the residual owner of the company. I.e., they have residual rights in economic benefits obtained from the business or realization from assets.

Explanation

We describe Equity Interest as the interest or ownership one person holds in the share capital of a companyShare Capital Of A CompanyShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more. A company funds its business needs from varied forms of funding. One of the major is through share capital. Under share capital, there are two types of holdings: equity share capital and preference share capital. Preference share capital is similar to a loan that binds a company to pay a fixed dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more. However, in the case of equity share capital, the company does not have a fixed repayment burden. Instead, the company pays these shareholders a dividend as decided by a board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more and top-level management. There might be a case where equity share capital does not earn even single rupee.

In case of liquidation of the companyLiquidation Of The CompanyLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more, the liability of equity shareholders is fixed to the extent of their share capital holding. Similarly, in the case of liquidation, if assets are left after settlement of all liabilities, it gets distributed among shareholders in proportion to their equity. Therefore, we calculate the net equity interest as the addition of all assets involved in a business reduced by outsiders liability and claims, also reduced by preference shareholders capital dues.

Equity Interest

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Example

Equity interest is nothing other than equity share capital holding. It may take various forms depending on the percentage of holding. Like if one company holds more than 50% share capital of another, it will form the subsidiary company. It will be known as an affiliated company if the holding is between 20 to 50%.

Equity Interest Rates

 In the case of multinational conglomeratesConglomeratesA conglomerate in business terminology is a company that owns a group of subsidiaries conducting business separately, often in distinct industries. It reflects diversification of operations, product line and market to allow business expansion.read more having a varied business and at varied locations, a single investor can’t invest in such a big company. In such a case, there are different investors, organizations like FII, FDI, joint investors, etc.. They invest their funds in a company that runs the business. Therefore, a company’s ownership division is into small shares with a fixed face(Base) value. Any person interested in a company’s growth potential may invest in its share capital. Accordingly, the percentage of share capital owned by an individual in its total share capital is its equity interest holdings.

The interest rate earned by such investors on their invested amount is known as the equity interest rate. There is no fixed amount which the company pays to an equity holder. Depending on the profits earned by the organization, its percentage also varies from year to year. As discussed earlier, equity holders are the residuary interest holders of a company. Therefore, the rate of returnRate Of ReturnRate of Return (ROR) refers to the expected return on investment (gain or loss) & it is expressed as a percentage. You can calculate this by, ROR = {(Current Investment Value – Original Investment Value)/Original Investment Value} * 100read more varies according to the value of profits the organization derives. The rates divide into various categories like total earnings, earnings distributed to equity interest holders in cash, accrued earnings. Accordingly, a stakeholder may compare different forms of earnings as per his requirement.

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How Shareholders Obtain Equity Interest?

Equity interest is nothing different from equity share capital.  There are varied forms in which a person can become an equity shareholder of any company. In the case of listed companies, a person can buy equity shares directly from the secondary marketSecondary MarketA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more where shares trade regularly or offline from brokers. Also, in the case of companies that are getting listed in stock markets for the very first time, a person can obtain it directly invest in the primary share marketShare MarketThe share market is a public exchange where one can buy and sell company shares based on the demand and supply of shares. read more. In the case of unlisted companies, usually, it is an organization that gets managed by a small group of interest holders.

In such a scenario, a person can obtain equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet.read more with the consent of all other shareholders. Also, a person may indirectly obtain equity by investing in different mutual funds and schemes that invest in listed companies’ equity share capital. Also, certain loan agreements contain stated terms and conditions like in case of non-payment, the grantorGrantorA grantor refers to a person who has created a trust to manage his/her assets and legally transfer them to the beneficiary to avoid inheritance issues. For instance, a grantor could be a father who has created a trust to control and manage his real estate property, money, and investments and transfer them to his family upon his demise. Since it is a legal process, management, taxation, and transfer terms are specified in the agreement or a deed.read more may get the right to own and obtain an interest in the share capital of the company.

Conclusion

Equity interest can be defined as the percentage of equity share capital owned by an individual. It gives the individual owner voting rights in a company. Further, it also gives the right to avail participation over the earnings of that organization. A company needs huge funds in running its day to day business. No single person has large funds to invest and take the risk in a business; accordingly, different people invest according to their capability and form share capital of a company.

Equity interest has residual ownership rights in the assets and earnings of a company. One can become the owner either by purchasing shares in a secondary market where equity shares are regularly traded or from the primary market (in a case where shares are getting listed for the first time). Also, sometimes an entity becomes an equity holder by the terms and conditions of any contract or agreement.

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