question_answer

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

Answer:

Ans.     Debentures provide following advantages over issue of equity shares.

1. Voting Rights: Voting rights are not given to debentures while equity shareholders have voting rights.

2. Dilution of Controlling Power: Since voting power is not given, therefore, if funds are raised by issue of debentures then controlling power does not get diluted.

3. Redeemable: Debentures are redeemable. Therefore, funds become flexible. When funds are not required permanently but for 5 or 10 years, debentures are more suitable.

4. Fixed Rate of Interest: Debentures are to be paid at fixed rate of interest. However, we need to share profits with equity shareholders.

5. Creditor versus Owner: Debenture holder is a creditor of the company and cannot take part in the management of the company while a shareholder is the owner of the company. It is the basic distinction between a debenture and a share.

6. Convertibility: Shares cannot be converted into debentures whereas debentures can be converted into shares.