Emergence of Equity Finance

Finance is required by every business to run and operate. Long term need for funds can be most fruitfully met by equity. Equity finance refers to the participation of general public in the ownership of the business. Equity finance is the procurement of funds by a company from the general public by issuing share certificates as ownership proof.

Equity Finance as a source of finance grew strong when the entrepreneurs searched for funds with no fixed commitment of interest/return. Then, equity finance as a mode was developed. Businessmen could then go to the public saying that the shareholders will be the owners of the business and will have a share in the profits earned. The profits were expected to be much higher than the prevailing debt market rates. Gradually, investors liking grew and they started bidding for acquiring shares of the company. This further gave rise to Book Building during the IPO(Initial Public Offer).

On the other hand,companies started enjoying the benefits in the form of freedom from fixed interest payments. Also it allowed them to raise funds with pledging/securitizing their assets. It was the cheapest and longest form of finance as the companies were committed to pay the money only at the time of winding up. The profits were paid to the shareholders in the form of dividend. Moreover,the companies could defer the payment of dividend and pay it on cumulative basis.

Global investors put on their money in the companies of developing and emerging economies and that was how growth of world economy was facilitated. Hence equity finance has proved to be a blessing for all.