Cost of Capital^55
For the investor the biggest benefit of investing in a preference share is that the dividends
are tax free in their hands. Which means if you are getting a dividend of 10 per cent
from a preference share and you are in 30 per cent tax bracket, your net return is still
10 per cent which is equivalent to receiving an interest income of 13 per cent from
fixed deposits or any other interest bearing source.
American / Global Depository Receipts (ADRs/ GDRs)
Equity shares that are offered in the international markets to international investors are
issued in the form of Depository Receipts (DRs). If these DRs are issued for US
investors in the US markets, then they are known as American Depository Receipts
(ADRs). They can be listed on New York Stock Exchange (NYSE) or National
Association of Securities Dealers Automated Quotations (NASDAQ) Exchange. If
they are issued for international investors to be listed on Luxemborg Stock Exchange in
Europe then they are called Global Depository Receipts (GDRs). What goes in the
hands of the investors is not a share certificate but a 'receipt' of a share certificate
which is lying with the depository. The benefits of keeping the shares in the depository
include: ease of transfer, no bad deliveries, less registrar & book keeping problems, etc.
DRs entitle the holders to get both dividend and capital gains. ADRs/ GDRs can be
converted into equity shares any time as they represent equity shares anyway and the
reverse conversion of equity shares into ADRs/ GDRs is allowed to the extent of the
first conversion.
ADRs/ GDRs give an opportunity to foreign investors to buy the equity shares in Indian
companies with the added benefits of trading in their own exchanges and without
registering in India for buying and selling securities.
Equity and Debt: A Comparison
- Equity shares do not carry any fixed charges on them. If the company does not
generate positive earnings, it does not have to pay equity shares any dividends.
This is very much in contrast to interest on debt, which must be paid regardless of
the level of earnings. - Equity shares have no maturity date - it is permanent capital that does not have to
be "paid back". While debt has a fixed maturity date and the debt taken has to be
paid pack on that date. - Equity shares can, at times, be easier to sell than debt. It appeals to many investor
groups because (1) equity shares typically carry a higher expected return than
does preference shares or debentures, (2) equity shares provide investors with a
better hedge against inflation than debentures, and (3) returns from capital gains
on equity shares are not taxed until the gains are realised whereas the interest
income on debentures is taxed regularly. - The sale of new equity shares gives voting rights, or even control if the stake is
high enough, to the additional new share owners who are brought into the company.