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

Debentures are long-term borrowed capital carrying a fixed rate of interest, and because debenture holders are creditors rather than owners, they are treated very differently from equity shareholders in ways that can work to the company's advantage. …

What debentures are: Debentures are an instrument for raising long-term debt capital carrying a fixed rate of interest. A debenture is an acknowledgement that the company has borrowed a sum it promises to repay; holders are creditors (not owners) and are paid a fixed, stated interest. Compared with issuing equity shares (ownership capital), debentures provide several advantages:

• Cheaper — tax saving: Interest on debentures is tax-deductible, which makes debentures less costly than raising equity capital (on which dividends are paid out of after-tax profit with no tax relief).
• No dilution of control: Debentures carry no voting rights, so financing through them does not dilute the control of the existing equity shareholders — unlike a fresh issue of equity, which dilutes both voting power and earnings.
• No sharing of profits: Debentures are fixed-charge funds — holders receive only their fixed interest and do not participate in the company's profits. So when the company prospers, the surplus earnings remain with the shareholders.
• Wider investor appeal: They are preferred by investors who want a fixed income at lower risk, helping the company tap funds from cautious investors who would not buy equity.
• Suitable for stable earnings: When a company's sales and earnings are relatively stable, it can comfortably meet the fixed interest, making debentures a sensible way to raise funds without giving away ownership. …