Question

Compare Ownership Capital (Equity) with Borrowed Capital (Debentures) and state three demerits of ownership capital.

Hint:

\textbf{Ownership Capital} represents funds contributed by the owners of the company, while \textbf{Borrowed Capital} refers to funds borrowed from creditors such as debenture holders. Equity shareholders bear higher risk but also enjoy ownership rights.

Answer 1

Concept:
In a company, capital can be broadly classified into two types: Ownership Capital and Borrowed Capital. Ownership capital represents the funds invested by the owners of the company (shareholders), while borrowed capital refers to funds borrowed from external sources such as debenture holders or financial institutions. Both sources of capital differ in terms of ownership, control, and financial obligations.

Difference between Ownership Capital (Equity) and Borrowed Capital (Debentures):

Basis of Difference	Ownership Capital (Equity)	Borrowed Capital (Debentures)
Ownership	Equity shareholders are the owners of the company.	Debenture holders are creditors and not owners of the company.
Return on Investment	Shareholders receive dividends, which depend on the profits of the company.	Debenture holders receive a fixed rate of interest regardless of profit or loss.
Control and Voting Rights	Equity shareholders have voting rights and participate in management decisions.	Debenture holders do not have voting rights or control over management.

Demerits of Ownership Capital:

1. Dilution of Control:
Issuing equity shares to a large number of shareholders may reduce the control of existing owners over the company.

2. Uncertain Returns:
Equity shareholders receive dividends only when the company earns profits, making their returns uncertain.

3. Higher Cost of Capital:
Ownership capital is often considered more expensive because companies may need to share a significant portion of profits with shareholders.