Distinction between Shares and Debentures

09/05/2021 0 By indiafreenotes

Stocks/Shares

Stocks or shares are popular investment tools, issued by corporate entities through which they sell a portion of their proprietorship to general investors and raise funds through it. These are also known as scrips or owned capital. As an owner of stocks, you are holding a part of the company’s financial capital. It entitles you to receive a portion of the company’s profit in return.

Types of stocks are

Equity shares
Preference shares

The price that you pay to buy shares is called share price. In return, you qualify to receive dividends as decided by the company. Profit is announced during the end of a financial year, which means, the longer you stay invested, higher will be your gain from the share.

Share prices depend on various factors, including market performance, macroeconomic parameters, sectoral performance, and individual company performance. As investment instruments, share are highly liquid and traded in the exchanges.

Debentures

Debentures are debt tools; issued by companies to raise funds as loans from the public. It is an acknowledgement from a corporate entity that it has taken a loan from you. However, a debenture isn’t a secured loan. It is backed solely by the creditworthiness of the issuing firm. But it carries some amount of assurance. It is why, in India, if a company declares bankruptcy, debenture holders have the first claim over the company’s assets.

Categories of debentures

Debentures also have different types, based on their intrinsic characters.

Perpetual Debentures: Perpetual debentures don’t have a maturity value and treated much like equities. These bonds create a lifelong stream of income for the investors, and they can trade those the market like equities.
Convertible Debentures: Some corporate give the offer to receive maturity value on debenture or get it converted to equity. This allows investors to alleviate some of the uncertainties associated with investing in unsecured bonds.
Non-convertible Debentures: It is a traditional type of bond that pays out the maturity and accrued interest at the end of the tenure without giving any opportunities to convert to equity.

Debentures can be either floating or fixed in nature. The payout on floating rate debenture varies with the market movement. But, for fixed-rate debentures, final payout remains assured.

	Shares	Debentures
Meaning	The shares are the owned funds of the company.	The debentures are the borrowed funds of the company.
What is it?	Shares represent the capital of the company.	Debentures represent the debt of the company.
Holder	The holder of shares is known as shareholder.	The holder of debentures is known as debenture holder.
Status of Holders	Owners	Creditors
Form of Return	Shareholders get the dividend.	Debenture holders get the interest.
Payment of return	Dividend can be paid to shareholders only out of profits.	Interest can be paid to debenture holders even if there is no profit.
Allowable deduction	Dividend is an appropriation of profit and so it is not allowed as deduction.	Interest is a business expense and so it is allowed as deduction from profit.
Security for payment	No	Yes
Voting Rights	The holders of shares have voting rights.	The holders of debentures do not have any voting rights.
Conversion	Shares can never be converted into debentures.	Debentures can be converted into shares.
Repayment in the event of winding up	Shares are repaid after the payment of all the liabilities.	Debentures get priority over shares, and so they are repaid before shares.
Quantum	Dividend on shares is an appropriation of profit.	Interest on debentures is a charge against profit.
Trust Deed	No trust deed is executed in case of shares.	When the debentures are issued to the public, trust deed must be executed.