 |
|
Companies commonly raise capital on the basis of equity or
debt. These approaches offer the advantages of general acceptance
and a known legal framework to facilitate the transactions.
However, both approaches have disadvantages:
| Disadvantages
of selling equity |
Disadvantages
of selling debt |
- Dilution of ownership and control
- Outside directors & shareholders
may force decisions favoring short-term profits rather
than long term competitive advantage
- Exposure to increasingly stringent
corporate governance laws
- Reporting requirements force disclosure
of
trade secrets
- Loss of entrepreneurial corporate
culture
|
- Repayment is required
- Creditors can force bankruptcy and gain control
of the debtor
- Cost of capital not aligned with business performance
- Debt perceived by investors and others can limit
strategic alternatives for growth
- Not acceptable to Muslim companies or investors
|
Rather than equity or debt, companies and projects can also
be financed based on their future revenues. Investors can
purchase a sliver of the company’s future revenues,
instead of a percentage of profits or promise of interest
payments.
| Royalty
Entitlement (RE) approach
advantages for investor
|
Royalty
Entitlement (RE) approach
advantages for issuer
|
- The RE produces quarterly income payments.
- The RE can produce profits without a company going
public or being bought.
- The RE shields the investor from the uncertainty
of profits. The RE is based on REVENUE, not profit.
- The RE does not utilize debt or interest, and,
therefore, is Shariah compliant and acceptable for
Muslim investors.
|
- The RE enables a company to raise capital without
suffering dilution or incurring debt, based on anticipation
of revenues.
- The RE does not involve voting rights, outside
shareholders or directors.
- The RE, as a percentage of revenues, increases
or declines with revenues.
- Shariah compliant method of financing a privately
owned or family business.
|
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