Types of Shareholders in a Company

Denise Elizabeth P
Senior Financial Editor & Contributor
Last Updated: May 19, 2021
Date Published: May 18, 2021

There comes a time in a growing company’s developmental cycle when it would need to expand to accommodate its increasing sales, management and operations.

When that time comes, companies need to raise funds to pay for the people, place, products, price and promotions it would take to successfully scale their businesses.

Raising funds from the market are done by companies in two ways: it can either collect investments through capital raised by issuing shares of ownership to interested investors or borrow money similar to a loan in the form of debentures.

The decisions on how the company will fund its expansion is made by its promoters who are in charge of raising funds through making investment vehicles available to the public, taking information about specific company investments and bringing it to the forefront of potential investors in order to encourage or entice them into investing in the company.

Capital raised through issuing shares of ownership are securities which are financial instruments representing monetary value.

These securities are held by investors in exchange for earning dividends from the funds they have put into the business.

The people who have invested and now hold or subscribe to shares as proof of their investment are considered as a specific part of the company’s stakeholders called shareholders.

Meanwhile, investors who lend money to help expand and grow a business are also given securities which are financial instruments representing the monetary value of how much they have lent the business and the percentage of interest they will be receiving in return with their role in the company’s stakeholder structure being considered as creditor stake while those who invest money in exchange for ownership have equity stake.

Shareholders become part of the owners of the companies they have invested in commensurate to the amount of capital they have contributed.

The more money they put into the business’ capital, the more they own the business.

How can new shares be raised?

Let us say that you have a company with branches in several cities.

Now is the time to raise capital so it can expand and better fuel its ongoing operations that have done nothing but grow, so much so that it has outgrown its current state.

It was discussed and agreed upon to issue shares to the market.

Issuing shares can be done in the form of the following:

Initial Public Offering (IPO)

Initial Public Offerings also commonly known as an IPO is a way for a private company to transition into a public one through the issuance of a new stock to the primary market which is basically just a platform for the selling of new stocks and bonds that are being made available for the first time.

Companies can not just hold an initial public offering out of a whim or whenever they want to; requirements set by the Securities and Exchange Commission (SEC) have to be met first.

Prior to holding initial public offerings, companies are considered private and are usually funded by its founders, their friends, families, venture capitalists, angel investors and the like.

The benefit of opening shares to the public is the potential of raising capital bigger than what was raised when the company was still privately funded, allowing a greater ability of growth and expansion to take place.

Initial public offerings are seen as a sign for an ‘exit’ to the founders and early investors of the company as they have now reached the full profit of their private investment with share premiums customarily distributed to current private investors who are still holding their shares.

Follow On Public Offer (FPO)

Follow on public offerings are also called secondary offerings and are a way for a company that is already listed on the stock exchange to issue supplementary or added stocks after its initial public offering has already been released.

Follow on public offerings fall under two types: dilutive & non dilutive.

Dilutive follow on public offerings occur when a company offers added shares to the market and its public investors; because of this, earnings per share decrease as the number of shares available increase.

Meanwhile, non diluted follow on public offerings occur when investors who are holding privately held shares such as board members, founders or pre-initial public offering investors sell those shares to the market.

No additional shares were issued so the earnings per share remains unaltered and are now considered as ‘secondary market offerings’.

Diluted shares help inject more money into the company to offset its debts and change its capital structure.

Non dilutive shares go directly to the pockets of the shareholders selling their shares.

Qualified Institutional Placement (QIP) and Qualified Institutional Buyers

Qualified institutional placements may not sound as familiar as other fund raising activities done through issuing shares and that is because this is an investment vehicle normally offered in Southeast Asian countries and India.

The main purpose of why qualified institutional placements are offered is to eliminate significant dependency on external or international sources through the issuance of securities minus all the legal paperwork in order to raise capital quicker than a follow on offering as qualified institutional placements do not have to comply with standard regulatory requirements.

Qualified institutional placements can only be purchased by qualified institutional buyers (QIBs) who are accredited investors governed by a presiding body.

Non Convertible Debentures (NCD)

Non convertible debentures are debt instruments made available to the market via public issue.

When companies would opt for long term capital, they offer non convertible debentures to investors who would like to make receiving regular interest at specified rates a part of their portfolio.

There are debentures that can be converted into shares that represent ownership of the company after a certain period of time and are done at the discretion of the shareholder.

With non convertible debentures, no ownership over the company can be claimed through shares although non convertible debentures are still worthwhile in investing.

The two kinds of non convertible debentures are: secured and unsecured.

Secured non convertible debentures are guaranteed by the company’s assets which ensures that in the event of a default, the liquidation of the company’s assets will be used to pay off its debt.

Unsecured non convertible debentures are not backed by the company’s assets which in turn makes it riskier with higher chances of return.

Rights Issue

A rights offering, also known as a rights issue, is a type of option given to existing stockholders of the company to avail of additional shares offered in a distinct group of rights also referred to as subscription warrants in proportion to the percentage of their current share holdings.

Rights offerings are optional in the sense that existing stockholders are not obliged to purchase the company’s additional shares.

During a rights offering, the subscription price is relatively lower than its present market value and are transferable which would allow the rights holder to sell them in the open market.

Rights offering is a way for the company to increase its capital while giving its existing stockholders a chance to increase their exposure to the share at discounted prices.

types of shareholders

Where Do I Find Shareholders?

There are quite a few resources you can tap into to find the shareholders of a company.

The company’s balance sheet gives an overview of the amount of capital coming from its shareholders.

The names of the shareholders are typically found in either the shareholding pattern detailed under a company’s annual reports or the shareholding pattern of the two major stock exchanges in the United States: the New York Stock Exchange (NYSE) or the NASDAQ.

Another way to find out the names of certain shareholders of a company is if the company is publicly trading its shares and is listed on the Securities Exchange Commission (SEC).

Finding the names of public company shareholders is as simple as looking at the Security and Exchange Commissions’ Electronic Data Gathering, Analysis and Retrieval System (EDGAR) where information to help investors decide if they would like to invest or not can be accessed and downloaded for free.

On the other hand, private companies do not list down their shareholders in SEC’s EDGAR and are unlikely to release their list of shareholders when reaching out to the company however, private companies funded by venture capital investors tend to refer and give credit to their investors in press releases while keeping that information posted on the company’s website.

Company annual reports also serve as a way to see the selling and buying activity of the company’s shares which promotes confidence and trust in the company while piquing budding investors’ interests through the information available on the performance of the company and its shares.

Types of Shareholders:

Types of Shareholders

Differing ownership and company structures will produce differing kinds of shareholders.

Companies that have raised funds by issuing equity or owner shares will have equity shareholders while companies that issue preference shares will have preference shareholders.

Companies that raised funds through borrowing or loaning money via the issuance of debentures will have debenture holders.

Each shareholder has different rights and yields or earning potentials in the structure of the company which will come in useful depending on the situation at hand.

Equity Shareholders

Equity shareholders also widely known as common shareholders, are the investors who own parts of the company.

These shareholders are the ones that are equipped with voting rights commensurate to the number of shares they own (i.e. the higher the amount of shares, the more power or weight their say has in the operations of the company).

Equity shareholders also have the right to question the management of the company and the right to decide how the company should be run.

In the event that a company needs to cast a poll to vote on whether acquisitions, debt financing, auditing or bringing in a new director is to be implemented or not, if the majority of the equity shareholders will oppose the motions being presented, then the promoters of the company will have to observe and conform to the shareholders’ decision.

In the event of the closing or the bankruptcy of the company, debenture shareholders are paid first followed by preference shareholders and lastly, whatever is left from the cash and assets whether liquidated or not is what will be paid back to the equity shareholders, dividing the total of what remains by the number of equity shareholders existing.

Equity shareholders are eligible for bonus issues where shares are given free of cost and to rights issues where shares are granted at discounted market prices for greater selling potential.

Equity shareholders are also entitled to stock buy backs where stock prices are increased by the company repurchasing its publicly traded stocks to reduce the number of shares outstanding which will increase the earnings per share (EPS).

Equity shareholders can be classified according to their shareholding pattern into institutional investors that can be domestic or foreign, promoters, or public equity shareholders.

Preference Shareholders

Preference shareholders also widely known as preferred shareholders, have no right or voice in the way the company manages or operates.

When it is time to vote to deliberate a company’s next moves, preference shareholders do not get to vote or participate leaving them with no right to question the management of the company and no right to decide how the company should be run.

Come time to receive shares of the company’s earnings, preference holders are given preference or priority over the dividend income out of the company’s profits.

Preference shareholders are given the profits the business made first then whatever is left is paid to the equity shareholders.

In the event of the closing or the bankruptcy of the company, preference shareholders are only second in pay out to debenture holders, allowing them to be compensated more than equity shareholders if there are any assets, cash or equivalents left to distribute.

Debenture holders

Debenture shareholders do not own any part of the company.

Rather, since they lend money to the company in exchange of interests earned after a specified tenure, they are considered as the creditors of the company.

As such, debenture shareholders are not entitled to voting rights.

Debenture shareholders also do not get paid in the form of dividends as they receive their earnings in the form of interest payments made by the company.

Interest payments do not fluctuate depending on how much the company has made in profits.

Rather, the interest paid out is set at a fixed rate, decided and agreed upon beforehand by the company and its debenture holders.

In the event of a company closing or filing for bankruptcy, debenture holders are paid first and foremost by the company’s assets, cash or equivalents as the company is considered to owe them and must pay off their debt obligation.

Example Scenario:

For this example, we will be looking at an undisclosed company’s shareholding pattern available below:

Promoters75.35%
Foreign institutional investors6.55%
Domestic institutional investors6.25%
Public11.85

Scenario Interpretation:

Promoters generally have the biggest stakes in their companies. They are after all, the ones that tend to be the most knowledgeable of the company’s financial status and prospects.

If more promoters are buying or holding onto their stocks, that means that based on the numbers they are seeing, they have faith in the operations of the company and are continuing to profit well.

The existence of institutional shareholders being higher than publicly traded stock holders show that the institutions in charge of managing substantial amounts of their clients’ money, are also seeing a profitable future in the company like the promoters are.

Due to the nature of institutional investors being fund managers, each move they make needs to be highly calculated and well researched more than any average investor can manage since their jobs depend on growing their clients’ money and the better they can grow it, the better they earn.

A slightly higher foreign institutional investor share shows that the company performs well enough for international investors to have interest in investing, with domestic institutional investors not falling far behind.

We can see when looking at the shareholding pattern that the company is sending a good signal to the investing population backed up with the confidence of the company’s promoters and its institutional investors.

Key Takeaways

  •  Companies can raise capital to finance their expansion and activities through offering shares of ownership with the people owning those shares being known as shareholders or through availing of debt from creditors known as debenture holders.
  • Different shareholder types have differing rights and benefits with equity shareholders having a say in how the company is managed to preferred shareholders having the first cut in the company’s profit to debenture holders being prioritized in the event of the company’s closure or bankruptcy.
  • New shares can be made through initial public offerings, follow on public offerings, qualified institutional placements through its qualified institutional buyers, non convertible debentures and rights issues.
  • The more shares are made available to the public, the lesser the earnings per share become.The shareholding pattern of a company can reveal how well the company is doing based on the buying and selling activities of the holders involved.