Unsecured Debentures vs. Equity
In order to establish, manage and expand businesses, capital is crucial. The companies require capital at various stages of their operations. In choosing a source of capital, the entrepreneur can select from any of the two broad means of financing - equity financing or debt financing. The debt financing includes the issuance of debentures. The Companies and Allied Matters Act (CAMA) defines a debenture as a written acknowledgment of indebtedness by the company setting out the terms and conditions of the indebtedness.
1. In the given question, I think unsecured long term debt like debenture could not be the plausible alternative to selling equity for the OM as trading unsecured debentures is less attractive to both the investors and the company. This belief is based on the number of arguments. The unsecured debentures are not supported by collateral security and not ensured the return of the interest and the principal. The unsecured debenture-holders are unsecured creditors of the company and don’t enjoy any special protection of their funds. Moreover, it is not easy for the common people to buy debentures as they are of high denominations. Additionally, this source of financing is least attractive to the company because the cost of raising capital through debentures is high of high stamps duty. They are not meant for the companies earning greater than the rate of interest which they are paying on the debentures. Under Rule 2(b)(X) of the Companied Rules, 1975, the unsecured debentures will not get the benefit as an exempt deposit. The companies Act, 2000 has introduced some special provisions, which implied that any issue of debentures should necessarily be secured. This has been done to protect the interest of the debenture - holders.
2. The outsider investors enjoy some substantial benefits while opting for buying equity instead of debentures. The investors become the member of the company and enjoy the voting rights. Equity has the potential for delivering
1. In the given question, I think unsecured long term debt like debenture could not be the plausible alternative to selling equity for the OM as trading unsecured debentures is less attractive to both the investors and the company. This belief is based on the number of arguments. The unsecured debentures are not supported by collateral security and not ensured the return of the interest and the principal. The unsecured debenture-holders are unsecured creditors of the company and don’t enjoy any special protection of their funds. Moreover, it is not easy for the common people to buy debentures as they are of high denominations. Additionally, this source of financing is least attractive to the company because the cost of raising capital through debentures is high of high stamps duty. They are not meant for the companies earning greater than the rate of interest which they are paying on the debentures. Under Rule 2(b)(X) of the Companied Rules, 1975, the unsecured debentures will not get the benefit as an exempt deposit. The companies Act, 2000 has introduced some special provisions, which implied that any issue of debentures should necessarily be secured. This has been done to protect the interest of the debenture - holders.
2. The outsider investors enjoy some substantial benefits while opting for buying equity instead of debentures. The investors become the member of the company and enjoy the voting rights. Equity has the potential for delivering