Why is interest paid during long gestation to share holders
Plz explain in detail
Karuna Sethi (CA) (838 Points)
18 May 2009Why is interest paid during long gestation to share holders
Plz explain in detail
Ravi kumar...A Big Fan of Admi
(Article Assistant)
(622 Points)
Replied 18 May 2009
IT is because you are loosing opportunity cost and to compensate this cost , yu are paid Int.
If the Company had started its business and made profits, it would have declared dividend.
But since some companies have long gestation period, they will require some time to make profits. Even they may incur huge losses duirng the initial periods.
hence to keep the share holders intact a company may pay interest out of Capital.
For your reference Sec 208 of the Companies Act deals with it.
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