Share Capital vs. Unsecured Loans

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Mitali Agarwal

Company Secretary

639 Points Posted on 04 January 2010

Hello Professional Colleagues,

Ours is a pblic ltd. unlisted co.

The promoters cum directors are interested in bringing a large amount of funds into the company by way of unsecured loans.

I think that investing into the company would be much better by way of subscripttion to share capital as compared to unsecured loans? but how to convince them?

Please if any learned member could give his/her views in this matter.

Regards,

ACS Mitali Agarwal

Replies (2)

Amir

Learner

4898 Points Posted on 04 January 2010

TO BRING LOAN OR CAPITAL, DIFFERENCE WILL BE AS FOLLOWS:-

1) EXPENSE - IF LOAN CARRIES INTEREST THEN IT WILL BE DEDUCTED UNDER INCOME TAX ACTSUBJECT TO 40A(2), BUT DIVIDEND ON SHARES WILL NOT BE DEDUCTED AS EXPENSE (FURTHER ADDITIONAL AMOUNT AS CDT @ 15% HAS TO BE PAID ON DIVIDEND)..

2) PROMOTER'S - INTEREST ON LOAN WILL BE TAXABLE IN THE HANDS OF DIRECTORS WHEREAS DIVIDEND WILL BE EXEMPT..

3) REPAYMENT - LOAN CAN BE REPAID IN CASE OF URGENT NEED OF FUNDS BY DIRECTOR'S..

4) FUTURE PLAN'S - IF IN FUTURE PROMOTER'S WANTS TO SELL A PART OF THEIR SHARE SHARES CAN BE SOLD AT ABOVE THEIR BOOK VALUE BUT LOAN WILL BE TAKEN AT BOOK VALUE.