What should companies prefer to raise money: Equity vs debt, Which Stock Exchange is better: NSE or BSE

Modified on June 29, 2020

The current article in this series provides responses related to:

  • Equity or Debt: What is the right way to raise money for companies?
  • BSE or NSE, which exchange to prefer to buy shares?

 

Equity or Debt: What is the right way to raise money for companies?

Hi Dr Vijay,

If any company needs fund for its expansion, then apart from internal accruals, if it goes for equity dilution then it will not need to make additional regular repayments like when it needs to do if it takes debt. However, it will cause equity dilution. If it creates additional debt instead of equity dilution, then it creates debt burden which will reduce its net profit margin (NPM).

So among these two ways: equity or debt which route is more detrimental to retail investors.

I was reading the project execution of Aksharchem (India) Limited (Read: Analysis: Aksharchem (India) Ltd). They have announced the capital expenditure of approx. ₹175 cr 5 month back. On their balance sheet, they don’t have much debt. And the internal accruals won’t suffice the funds requirements. Hence, among the two sources of additional funds: equity and debt option, the board has approved raising equity via QIP at a price of ₹816 and 5% discount. This is approx. 8% lower than CMP ₹850.

As per my understanding, it makes equity dilution for retail investors while containing the debt repayment burden for business, which it needs to pay regularly. So in the long run, it may benefit business and in turn, also benefit the investors.

Companies may choose the other option of raising debt without diluting equity if they have confidence in the business and want to keep investors’ interest intact.

I think that in this case, if the management is investor friendly, then it will go for debt option because in any case, currently, they don’t have much debt burden.Please provide your inputs on my approach and whether I am missing anything.

Author’s Response:

Hi,

Thanks for writing to us and sharing your views.

Your reasoning is in the right direction.

Moreover, it might be one of the consideration by the management that the share price is at all-time high and they might want to take the advantage of the same by raising equity at current high prices.Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

BSE or NSE, which exchange to prefer to buy shares?

Hi Vijay,

One query, that I would like your help with.

While buying shares, I see that more often than not, we have the option of buying at NSE as well as BSE. And there will be some price difference for the same stock between these two exchanges. Any recommendation or suggestion on which exchange one should prefer. Is it ok to go ahead with the exchange where it is cheaper at the time of purchase? Or are there any other considerations to keep in mind?

Regards,

Author’s Response:

Hi,

Thanks for writing to us!

We do not differentiate among the two exchanges and buy stocks from whichever exchange, it is available at a cheaper price.

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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