Also, of course, businesses do genuinely end up in trouble, which makes them incapable of paying up. In practice, the legal safeguards are useless. Any Indian lender is simply making a call on the borrower's honesty and business acumen. Honesty because the borrower must intend to repay, and acumen because without profits, repayment will be impossible. In practice, the equity investor depends on the correct assessment of exactly the same attributes.
Financial theory has much to say on the subject of risk-reward relationship.
If the risk is higher, the reward must naturally be higher. Textbooks classify debt as less risky under the assumption that borrowers are legally obliged to return loans with interest, while equity investments could go up in smoke. However, because of India's leisurely legal system, debt is actually no less risky and it certainly gives lower returns than equity. A case for equity. A conservative investor who buys this argument and moves away from debt doesn't need to bet on new companies, with risky business models, in the hope of picking up the occasional big winner to compensate for the inevitable losers.