Differences between Shares and Debentures


The total capital of a company may be divided into small units called shares. For example, if the required capital of a company is US $5,00,000 and is divided into 50,000 units of US $10 each, each unit is called a share of face value US $10. A share may be of any face value depending upon the capital required and the number of shares into which it is divided. The holders of the shares are called share holders. The shares can be purchased or sold only in integral multiples.
Equity shares signify ownership in a corporation and represent claim over the financial assets and earnings of the corporation. Shareholders enjoy voting rights and the right to receive dividends; however in case of liquidation they will receive residuals, after all the creditors of the company are settled in full.
A company may invite investors to subscribe for the shares by the way of:
- Public issue through prospectus
- Tender/ book building process
- Offer for sale
- Placement method
- Rights issue
Debentures/ Bonds
The term Debenture is derived from the Latin word ‘debere’ which means ‘to owe a debt’. A debenture is an acknowledgment of debt, taken either from the public or a particular source. A debenture may be viewed as a loan, represented as marketable security. The word “bond” may be used interchangeably with debentures.
(i) Share money forms a part of the capital of the company. The share holders are part proprietors of the company, whereas debentures are mere debt, and debenture holders are just creditors.
 (ii) Share holders get dividend only out of profits and in case of insufficient or no profits they get nothing and debenture holders being creditors get guaranteed interest, as agreed, whether the company makes profit or not.
 (iii) Share holders are paid after the debenture holders are paid their due first
(iv) The dividend on shares depends upon the profit of the company but the interest on debentures is very well fixed at the time of issue itself.
(v) Shares are not to be paid back by the company whereas debentures have to be paid back at the end of a fixed period.
(vi) In case the company is wound up, the share holders may lose a part or full of their capital but he debenture holders invariably get back their investment.
 (vii) Investment in shares is riskier, as it represents residual interest in the company. Debenture, being debt, is senior.
 (viii) Debentures are quite often secured, that is, a security interest is created on some assets to back up debentures. There is no question of any security in case of shares.
 (ix) Share holders have a right to attend and vote at the meetings of the share holders whereas debenture holders have no such rights.

Friday, 02nd Oct 2015, 09:07:39 AM

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