Making use of debt in the operations of a company is a common practice. But during a downturn it becomes a huge burden to be carried along. In addition, the lower interest rate regime also gives companies' an opportunity to restructure debt, if not reduce it.
Debt has been a critical component in the capital structure of a company. It has been an oft used financing option for most companies be it to fund a new project, undertake massive restructuring, modernization of plants or expanding the business. At one point or the other companies have turned towards debt in addition to equity and other options of pooling in capital. Irrespective of what the financial management theory has to say on the impact of debt on the company, it has hardly been an object of observation except in the downturn when meeting the interest requirements becomes difficult.
Traditionally, debt has been a low cost source of finance as compared with the equity market and usually companies have found it to their advantage that some amount of their capital requirement comes from debt. The interest paid to creditors is tax deductible in most countries. Another advantage of debt is that it does not dilute the ownership of the business and the cost is limited to the interest paid till the time the principal is to be returned back. In addition, the interference of creditors in the affairs of the business is minimal unless they supply a very large amount of the capital, which retains the operational freedom of the management in conducting business. Compared with equity where ownership is the main objective of the investors, creditors are only interested in the return of their funds and the return on investment thereon. Prior to liberalization, companies depended heavily on institutions like IDBI, ICICI and banks for their long-term and short term funding requirements respectively. But after liberalization, the development in the debt markets has led to the use of debentures, corporate bonds and commercial paper. In addition, the decade of reforms was also a time when many businesses were on an expansion spree and the off-take of debt was good from all the various sources along with the booming equity markets.
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