Question

Read the given passage and answer the following question.

VTM Textile Mills is one of the largest manufacturers of various types of textile products from Ahmedabad, Gujarat. The company is equipped with state-of-the-art dyeing, printing and processing and garmenting facilities. Due to the prolonged pandemic and slackness in the market demand, the company is facing shortage of funds. The company has started preliminary work for expansion of textile manufacturing capacity in their existing plant at Ahmedabad as well as installation of a new manufacturing unit at Panipat, Haryana at an estimated cost of ₹ 10 Crore. The company has decided to issue equity shares for this purpose. Also, the company needs funds for meeting its day-to-day expenses like daily wages and overheads, etc. The finance manager of the company approached one of its suppliers to grant two months credit on purchase of raw cotton. This would enable the company to get cotton supplies without making immediate payments.

Which of the following is NOT a merit of equity shares?

Options

• Suitable for risk-taker investors

• Less formalities are involved as compared to debentures

• Serves as permanent capital for the firm

• Investors enjoy voting rights

Answer 1

Less formalities are involved as compared to debentures

Explanation:

1. Suitable for risk-taker investors: True. Equity shares are ideal for investors willing to take risks for higher returns.
2. Less formalities are involved as compared to debentures: Incorrect. Actually, issuing equity shares involves more legal formalities, like compliance with SEBI guidelines, prospectus filing, and stock exchange listings. Debentures, being debt instruments, generally involve fewer formalities.
3. Serves as permanent capital for the firm: True. Equity shares are not repayable except at liquidation.
4. Investors enjoy voting rights: True. Equity shareholders have voting rights in the company’s decisions.