Debt Traps

Debt versus equity is an ancient debate without clear cut answers.

Taking on debt normally means a straightforward obligation with clearly calculated costs. Selling equity implies permanent dilution of control and the foregoing of some long-term profits.

However, the obligation to service debt can sink a new business. Equity obligations are not that stringent. There is no legal obligation to pay dividends until such time as the company wishes to. If the business is successful and high-growth, the company may not need to pay out profits. Capital appreciation in the secondary market takes care of returns.

But all these guidelines hold true only where efficient corporate governance is available. In India, the choice between debt and equity usually boiled down to something else. With political connections, debt was the better option. Without political connections, equity was preferable.

Until very recently, Indian corporate debt didn