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Difference between Shares and Debentures

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  • Last Updated : 21 Dec, 2022
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Issuing of Shares and Debentures are two of the most prominent source of finance for any business. By issuing shares and debentures, any public company can generate finance from the market. Finance required by the business to establish and run its operations is known as Business Finance. No business can function without an adequate amount of funds for undertaking various activities. To be able to produce goods or provide services, any business needs money.

Share:

A Share is a unit of small denominations that sum up to form a capital. The company’s capital is divided into smaller portions or units that represent the company’s ownership percentage. Each such unit is called a share. Section 2(84) of the Companies Act, 2013 defines “A share is the interest of a member in a company.” For Example: If the Capital of the company is ₹20,00,000, divided into 2,00,000 units of ₹10 each. Each such unit of ₹10 will be called a Share.

 The share shows the claim of the shareholder in the equity of the company. The purpose of dividing the capital into shares is to raise the fund conveniently required by the company. The shares are movable and transferable property that can be exchanged easily. A share of the public company is freely traded at the Stock Exchange, and is considered good under The Sales Of Goods Act, 1930. The value of the share is subject to change depending upon various market factors and the value keeps on fluctuating. The shares are broadly classified under two categories:

  • Equity Shares               
  • Preference Shares

Debenture:

A Debenture is a long-term debt instrument issued by a company to borrow a fund from the market. Debentures are a form of debt capital. A Debenture carries a fixed rate of interest called a ‘ Coupon Rate’, which is paid at a specific date, whether a company makes a profit or a loss. It is a good source of finance for companies that do not want to dilute their equity or lack collateral for the Loan. A Debenture issued by the company is in form of a certificate, given under the common seal of the company. A debenture certificate states the Principal amount lent by the investor, the rate and terms of interest payment, and the terms of repayment of the principal amount at a specific period.

As per Section2(30) of the Companies Act, 2013, “Debenture includes debenture stock, bonds or any other securities of a company, whether constituting a charge on the assets of the company or not.” The Companies Act further states that no company is allowed to issue debentures having a maturity period of more than 10 years from the date of issue. However, infrastructure companies can issue debentures for more than 10 years but not exceeding 30 years.

 Difference between Share and Debenture:

Basis

Shares

Debentures

Meaning A share is a unit(a part) of the capital of the company. A debenture is a debt instrument issued to raise a borrowed fund.
Nature A share form an Equity capital. A debenture form a debt capital.
Holder A holder of a share is known as a shareholder. A holder of a debenture is known as a debenture holder.
Return A shareholder earns a dividend in return for their investment. A debenture yields a fixed rate of interest(coupon rate) at a specified date.
Dividend and Interest Payment A dividend is paid only when there is a profit. An interest on debenture is paid irrespective of whether the company is making a profit or incurring a loss.
Voting Rights A shareholder enjoys the right to vote at the company’s meeting. A debenture holder has no right to participate or cast a vote at the company’s meeting.
Redemption A company, at its option, can buy back its own shares.  A debenture shall be redeemed at a fixed maturity date.
Conversion A share cannot be converted into debenture. A debenture can be converted into shares as per the term of the issue.
Priority of Repayment At the time of winding up, payment to shareholders is made after the repayment to a debenture holder. At the time of winding up, payment to the debenture holder is made before the payment to the shareholders.
Issue at Discount Section 53 of the Companies Act restricts the issue of shares at discount, except for the sweat equity shares. A debenture can be issued at discount without any restrictions.
Degree of Risk High degree of risk is borne by the equity shareholders. Debentures are the debt for the companies, hence debenture holders bear little risk. 
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