Such covenants may include distribution of dividends, new additional external finances (other than equity issue) for

existing or new projects, maintain working capital requirements at a particular level. These covenants may therefore restrict the companies investment, financing and dividend policies. Violation of these covenants can lead to serious adverse consequences. To overcome these restrictive covenants, the companies may ask for and provide for early repayment provisions even with prepayment penalty provisions in the loan agreements. Control In designing a suitable capital structure, the management of the companies may decide and desire to continue control over the companies and this is true particularly in the case of first generation entrepreneurs. The existing management team not only wants control and ownership but also to manage the company without any outside interference. Widely held and closely held companies may opt to pursue appropriate strategies to hold back their existing management controls. Issue costs Issue or floatation costs are incurred when a company decides to raise debt capital in the market. These debt issue costs are normally expected to be lower than equity issue costs. This alone will encourage the companies to pursue debt capital. Retained earnings do not involve issue costs. The source of debt also influences the issue costs. Regulations like stamp duty on commercial paper or certificate of deposits may also jack up the issue cost for the companies. Thus companies will prefer to go after debt capital for the following reasons Tax deductibility of interest (availability of tax shield) Higher return to shareholders due to gearing Complicated, time consuming procedure for raising equity capital No dilution of ownership and control Equity results in permanent commitment than debt Some frequently asked questions 1. How do firms raise capital for their investments?

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