question_answer 19)

What advantages does issue of debentures provide over the issue of equity shares?

Answer:

Debentures are long term debt instruments which bear a fixed rate of interest. The debenture issued by a company is an acknowledgment that the company has borrowed a certain amount of money, which it promises to repay at a future date. Debenture holders are paid a fixed stated amount of interest at specified intervals say six months or one year. Issue of Zero Interest Debentures (ZID) which do not carry any explicit rate of interest. It has also become popular in recent years. In the case of ZIDs, the difference between the face value of the debenture and its purchase price is the return to the investor. Merits of Debentures over Equity Shares (i) Debentures are preferred by investors who want fixed income at lesser risk. (ii) Debentures are fixed charge funds and do not participate in profits of the company. (iii) The issue of debentures is suitable in the situation when the sales and earnings are relatively stable. (iv) Financing through debentures does not dilute control of shareholders on management as debentures do not carry voting rights. (v) Financing through debentures is less costly as compared to cost of equity capital as the interest payment on debentures is tax deductible.