Differences Between Shares and Debentures

 Debentures

•        In corporate finance, a debenture is a medium to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally referred to a document that either creates a debt or acknowledges it, but in some countries the term is now used interchangeably with bond, loan stock or note.

•        A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital.

•        Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company's financial statements.

Major Differences Between Shares and Debentures

• ·       The holder of shares is referred to as a shareholder while the holder of debentures is referred to as a debenture holder.
• ·       The shares signify the shareholder’s ownership in the company whereas debentures signify the company’s indebtedness.
• ·       Share is the company’s capital whereas Debenture is the company’s debt.
• ·       The return on shares is the dividend, whereas the return on debentures is the interest.
• ·       Unlike debentures, shares are inconvertible.
• ·       In the case of winding up, debentures get priority over shares and are repair prior to the repayment of shares.
• ·       No security charge is formed for payment of shares. On the other side, a security charge is formed for the payment of debentures.
• ·       Shares can be issued at a discount with some legal compliance. Debentures can be issued at a discount in the absence of any legal compliance.
• ·       In the case of shares, no trust deed is executed, on the other hand, a trust deed is executed during the issuance of debentures to the public.
• ·       Shareholders have the voting right, however, no voting rights are entrusted to the debenture holders.
• ·       The dividend can be paid only from the current profit made by the business, not otherwise. The company has to pay the interest on debentures to the debenture holders, whether or not profit is earned by the company.

There Are Different Types of Debentures, Which Are as Follows:

·       Secured Debentures

·       Unsecured Debentures

·       Convertible Debentures

·       Non-convertible Debentures

·       Registered Debentures

·       Bearer Debentures