Key Differences

Know the Differences & Comparisons

Difference Between Shares and Debentures

shares vs debenturesIssuing shares is the primary method of raising funds for companies. Shares are the owned securities, and share capital is the owned capital. Generally, the capital of the company is divided into a number of equal units, i.e. shares. It describes the holder’s right to the specified amount of the company’s share capital.

Conversely, debenture implies a long-term instrument showing the company’s debt towards the external party. It yields a definite rate of interest, issued by the company and may or may not be secured against assets like stock and debtors.

For every publicly traded company, the issuance of shares is mandatory and must be maintained throughout the company’s life. As against, it is not compulsory for every publicly traded company to issue debentures.

In a world where people want to multiply their income and become financially independent at an early stage of their life, it is crucial to know the difference between shares and debentures.

Content: Shares Vs Debentures

  1. Comparison Chart
  2. What are Shares?
  3. What is Debentures?
  4. Key Differences
  5. Video
  6. Similarities
  7. Conclusion

Comparison Chart

Basis for ComparisonSharesDebentures
MeaningShares are a form of security indicating the ownership in an organization.Debentures refer to a kind of security that indicates debt to a company.
What is it?Shares represent the capital of the company.Debentures represent the debt of the company.
FundCompany-ownedBorrowed
HolderThe holder of shares is called a shareholder.The holder of debentures is called a debenture holder.
Status of HoldersOwners of the company.Creditors of the company.
IndicatesA part of the company's capital.Loan
Voting RightsYesNo
ReturnThe company pays dividends to shareholders.The company pays interest to debenture holders.
Payment of ReturnDividends can be paid to shareholders only out of profits.Interest can be paid to debenture holders even if there is no profit.
Allowable deductionThe dividend is an appropriation of profit, so it is not allowed as a deduction.Interest is a business expense and is allowed as a deduction from profit.
ConvertibilityNot convertible into debentures.Convertible into shares
Repayment in winding upRepayment of capital to shareholders is made after paying off liabilities.Debentures get priority over shares, and so they are repaid before shares.
Return on InvestmentOn recommendation by the board, the dividend is paid to the shareholders.Fixed-rate of interest paid before the dividend declaration.
ChargeIt does not carry any charge.Charge on the assets of the company.
Trust DeedNo trust deed is executed in the case of shares.When the debentures are issued to the public, a trust deed must be executed.

What are Shares?

The smallest division of the company’s capital is share. It is a part, interest, or, say, share in the share capital of a company. A share is the unit into which the company’s capital is divided. It represents the interest in the assets and the company’s profits. It also covers several rights provided by the company’s Articles of Association. Shares have a unique number and face value.

The shares are offered for sale in the open market, i.e. stock market, to raise capital for the company. The rate at which the shares are offered is the share price.

Note: Only a public limited company can issue shares to the general public through an IPO or FPO. To subscribe to the shares, the general public has to submit their applications.

Characteristics of Shares

characteristics-of-shares

  • It is an ownership security. Simply put, the shareholder is a part owner of the company.
  • Shares have a nominal value, and they carry a unique number.
  • A share certificate is issued under the common seal of the company. It certifies that the person whose name is stated is the registered holder of a defined number of shares.
  • The company can issue shares at par, premium and at a discount.
  • The shares are movable, i.e. transferable from one shareholder to another.

What is Share Capital?

Share capital is the total of the nominal value of shares of a company is share capital.

Types of Shares

Shares are of two types:

  1. Equity Shares: The shares that carry voting rights on which the rate of dividend is not fixed. They are irredeemable in nature. These are ordinary shares of the company. They do not carry any preferential rights or priority in dividend payment and capital repayment. These shares are issued first, before any shares are issued, and their repayment is made at the last. The company pays dividends to shareholders only when it earns profit.
  2. Preference Shares: Shares that enjoy certain privileges or preferential rights as to dividends and return on capital. The dividend is paid at a fixed rate to the preference shareholders before the payment of the dividend to equity shareholders. In the event of liquidation of the company, capital of preference shareholders must be repaid prior to the repayment of capital to equity shareholders.

Also Read: Difference Between Equity Shares and Preference Shares

What are Debentures?

A debenture is a long-term debt instrument issued by the company under its common seal to the debenture holder. A loan raised by a firm is divided into numerous parts, wherein each part is called a debenture. It shows the indebtedness of the company. Therefore, the capital raised by the company is the borrowed capital. Hence, debenture holders are the company’s creditors. Further, they are freely transferable.

A debenture is a certificate that the borrowing company issues to the debentureholder indicating the amount lent by him. In simple words, the certificate or document is nothing but an acknowledgement of debt, plus it is a formal promise to repay the given sum along with interest on or before the date prescribed. The certificate is issued under a common seal. It is serially numbered.

They do not carry voting rights. There is a fixed rate of interest paid to the debenture holders every year. The interest is paid to the holders periodically till maturity.

A debenture is like a bond by the company. The company offers shares to the public by means of a prospectus. It contains terms and conditions for repayment of both principal and interest.

Characteristics of Debentures

characteristics-of-debentures

  • It is a creditorship security.
  • It represents borrowed capital.
  • Interest is paid yearly, even when the company does not profit. If interest and borrowed funds are not paid to the debenture holders on a timely basis, they can take legal action against the company.
  • Debentures do not carry any voting rights.
  • Debentures are repayable after a specific period of maturity or when the company goes for liquidation.

Types of Debentures

  1. Secured Debentures
  2. Unsecured Debentures
  3. Convertible Debentures
  4. Non-convertible Debentures
  5. Registered Debentures
  6. Bearer Debentures

Also Read: Difference Between Bonds and Debentures

Key Differences Between Shares and Debentures

  1. Shareholders are the owners of the share units of the company, whereas debenture holders are creditors of the company. A share is a part of the company’s owned capital. On the other hand, debenture is a part of a company’s borrowed capital.
  2. The dividend is paid to shareholders as a return. However, it is paid only when the company earns profits. As against, interest is paid to the debenture holder, no matter if the company earns a profit or not.
  3. The dividend of the company varies with the amount of profit earned by the company. In contrast, the rate of interest on debentures is fixed, and it is not dependent on the profits earned. So, it is regular.
  4. The company issues shares without any mortgage or charge against the company’s property. However, debentures are usually issued against the security of specific assets like stock or debtors. One should note that debentures can be unsecured while a share is generally secured.
  5. In case of winding up of the company, shareholders have residual rights. On the other hand, debenture holders have the first right to the company’s assets after paying off dues and employee liabilities.
  6. As a matter of right, the holder cannot claim a dividend. On the contrary, as a matter of right, the holder can claim interest.
  7. Shares carry voting rights, and they have the right to participate in the company’s management. Conversely, debentures do not carry voting rights. Also, they cannot participate in the company’s management.
  8. Share capital is refundable only when the company goes into liquidation. As against, the company can refund the amount of debentures even before the winding up of the company. It must be repaid as per the terms of the issue. The company cannot repay redeemable preference shares without formality.
  9. Repayment to debenture holders takes place first; thereafter, repayment of capital to shareholders takes place. Sharecapital is repaid after settlement of the claims of debentureholders and creditors.
  10. Conversion of debentures into shares is possible in the case of convertible debentures. However, it is not possible to convert shares into debentures.
  11. Interest paid to debenture holders is tax deductible from profits after charging income tax. However, the dividend is not tax deductible.
  12. A trust deed is not executed in the case of shares. In contrast, a trust deed is executed when the debentures are issued to the public.
  13. Shares are issued at a discount, subject to some legal compliance. Debentures can be issued at a discount without any legal compliance.

Video: Shares Vs Debentures

Similarities

  • Both are Financial assets.
  • company issues shares and debentures to public.
  • Source of raising money for the company.
  • They can be issued at a discount.

Conclusion

Above all, share capital appears under ‘ shareholder’s fund’ on the equity and liabilities side of the Balance Sheet. Conversely, debentures appear under long-term borrowings, under the head ‘Non-Current Liabilities’ in the equity and liabilities side of the balance sheet.

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