Question

Give an example of a hybrid that is considered liabilities and can be considered as capital?

Answer 1

When a company owes to outsiders it is known as Liability. Company has a legal and constructive obligation to repay it.

However, Capital indicates the ownership rights. Owners of Capital have the voting rights in the company.

Example of Hybrid Instruments that are considered as liabilities and can be considered as Capital.

1) Convertible Preferance Shares:- This is a type of hybrid instrument which gives right to the preference shareholders to convert it into the equity stocks. Once it gets converted into Equity Stocks, it changes from liability to Capital. Until the conversion is made, the company has a legal obligation to pay preference dividend to the preference share holders. After conversion, there is no obligation to pay dividend, and the preference share holders are considered as Equity stock holders.