Merits of debenture issue in comparison to equity shares are:
1. Low cost –
The cost of establishment is comparatively low in debentures than shares.
2. No Interference in Management –
The debenture holders have no voting rights, therefore, they have no interference in the management of the affairs of the company, while shareholders have the full right in the management of the company.
3. The attraction of Investors –
Investors are more interested to invest their capital in the debentures, especially the ones who want a guaranteed result on their fixed investment. Therefore, the debenture issuers can easily get finance from this. This is the most easier way of arranging funds for the company.
4. Accepted Expenses of Interest –
Interest is a compulsory expense in debentures. Therefore the company can show it is profit and loss account. This way the tax imposed on it also gets reduced.
5. Low rate of Interest –
There is a low rate of interest on the investment of debentures. Therefore, investors earn less profit here.
6. Flexible –
Many times, in the case when the market is good, the shareholders issue the shares in a large amount and collect the funds. It can result in higher capitalization. This is not in the case of debentures. Thus, more compilation of funds can be processed on debentures.
7. Suitable to fixed income and sales institutions –
Those financial institutes who have suitability to fixed income and sales, they can collect capital through debentures and can access far more profit, because they have to pay a fixed rate of interest, and the additional profit earned is received by the debenture holders.
8. Less Risk to Investors –
Debentures have a fixed rate of interest, while there is no guaranteed rate of interest in shares, and if there is profit, then there is no guarantee of its amount. Therefore, debentures hold more rate of interest along with lesser risk.
9. No effect on shareholders and debenture holders –
Debenture holders do not participate in profit-taking, but they receive interest at a fixed amount, and thus shareholders do not bear any risk. In the same way, it does not affect the previous debenture holders. And if the shares are issued, then their holders affect the previous profit and thus issuing shares can result in conflicts.
