The key difference between Shares vs Debentures is that Shares are the capital that is owned by the shareholders in the company. It gives the right to vote in the matters of the company and the right to claim their share in the profits of the company. Whereas, debentures are the debt instruments secured in nature issued by the company for raising funds. It has fixed rate of interest with cumulative and non-cumulative features redeemable after fixed interval either in installment or in lump sum.
Shares vs Debentures
The corporate world has its own set of capital structure. They are having a highly complex capital format, which includes share capital, debt fund, angel capital, reserves, and surplus, etc. Each component of capital structure has its peculiarities, which makes it suitable to its own set of situations and circumstances.
What is Share?
Shares are the ownership capital that is held by the owners of the company. The holder of the shares are considered as owners of the company and enjoys various rights under the statutes. Shares are the unit of measurement of the share capital of the company. Common stock, scrip, owned capital, etc. are the other terms used for Shares.
What is Debenture?
Debentures are the acknowledgment of the company towards the debt borrowed by the particular corporate entity towards the fund provider, i.e., an investor in the form of debt. These are the debt instrumentThese Are The Debt InstrumentDebt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans. that corporates are using to fulfill their capital requirement by giving assets as mortgage/security. Presently, in India, all the debentures have the first charge over the assets of the company.
Let us take an example of Debenture.
ABC Ltd is floated by the promoter group of XYZ by issuing the equity share capital of $500 million by issuing shares of 50 million each of $10. Also, they bought machinery and equipment by issuing non-convertible Debenture (NCDs) of $300 crore.
Here, Equity share capital is the basic capital and owned by the public and promoters group. While NCDs are the debt taken from the public is an example of the Debenture.
Shares vs. Debentures Infographics
Critical Differences Between Shares and Debentures
- The share capital is the owned capital, common stock, fundamental capital of the company, while Debenture is the acknowledgment of the company to the debt provider to the company.
- Shares are compulsory for every company to issue, while debentures are not mandatory to be issued by every company.
- Shares are entitling for the dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company. right while debentures are entitling for the interest payment.
- Shares do not have any lien against their investment, while debenture holders have pledged over the assets of the company.
- ShareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. are the owners of the capital and have the management right in the company, while debenture holders are the creditor of the company. Hence they do not have any management rights.
- Shareholders are the real risk bearers as they do not have any security against their investment, while debenture holders are not facing risk as they have a lien over the asset in favor of them.
- At the time of liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order., shares have a residual interest over the asset, left after the repayment of all dues and payables. In contrast, debentures are having the first right after the repayment of all the statutory dues and employee payments.
- Shares can never get converted into any form of capital structure, while debentures can get converted into shares or other ownership capital.
- For the company, it is not mandatory to return the share capital to the shareholders. In contrast, for the company, it is mandatory to make the payment and repayment of interest and principal to the debenture holders.
- Examples of the shares are equity share capital or preference share capitals, while an example of the debentures is convertible Debenture, non-convertible debentures, etc.
- Shareholder’s fund is to be disclosed under the shareholder’s fund in balance sheet while debentures are to be disclosed under non-current liabilities under long term liabilitiesLong Term LiabilitiesLong Term Liabilities, also known as Non-Current Liabilities, refer to a Company’s financial obligations that are due for over a year (from its operating cycle or the Balance Sheet Date). .
|Structure||Shares are the ownership capital of the company.||Debentures are the debt for the company.|
|Dividend Right||Shares have, by default, dividend-right in the profit of the company.||Debenture holders have the right to receive interest against the debt fund given by them.|
|Voting Right||Shareholders have voting right in the annual general meeting of the company.||Debenture holders do not have the right to vote in the general meeting.|
|Conversion||Shares are not convertible to debt or such other structure of the capital.||Debentures can be issued with the option of getting converted into shares.|
|Risk holder||From an investor’s point of view, Shareholders are the highest risk owner of the company.||From an investor’s point of view, investment in debentures is one of the most secure instruments of investment.|
|Lien||Shareholders do not have any lien on the assets of the company.||In general, debenture holders have a lien in favor of them against all the assets of the company.|
|Owner/Creditor||Shareholders are the Owners of the company.||Debenture holders are the creditor of the company.|
|Right at the time of liquidation||Shareholders have the residual right at the time of liquidation.||Debenture holders have the first right on the asset of the company after repaying the statutory dues and employee payments.|
|Leverage||Shares do not give any leverage benefit to the company.||Debentures give the leverage benefit to the company.|
|Compulsion to issue||For every company, to issue share capital is mandatory and needed to be maintained throughout the life of the company.||Every company doesn’t need to issue Debenture for issues.|
|Compulsion of return||For the company, it is not mandatory to declare a dividend.||For the company, it is mandatory for the company for payment and repayment of interest and debt.|
|Example||An example is equity share capital and preference share capital.||Examples are non-convertible debentures, convertible debentures, 2nd charge debentures, etc.|
|Disclosure in financial statement||The share capital is to be disclosed under “Shareholders funds “on equity and liabilities side in the balance sheet.||Debentures are to be disclosed under long term borrowings under Non-Current LNon-Current LThe most common examples of Non-Current Liabilities are debentures, bond payables, deferred tax liabilities etc. Non-Current Liabilities are the payables or obligations of an entity which might not be settled within twelve months of accounting such transactions. The most common examples of Non-Current Liabilities are debentures, bond payables, deferred tax liabilities etc. Non-Current Liabilities are the payables or obligations of an entity which might not be settled within twelve months of accounting such transactions. The most common examples of Non-Current Liabilities are debentures, bond payables, deferred tax liabilities etc. Non-Current Liabilities are the payables or obligations of an entity which might not be settled within twelve months of accounting such transactions. iabilitiesIabilitiesThe most common examples of Non-Current Liabilities are debentures, bond payables, deferred tax liabilities etc. Non-Current Liabilities are the payables or obligations of an entity which might not be settled within twelve months of accounting such transactions. in equity and liabilities side in the balance sheet.|
Just like the two sides of the coin, shares and debentures have their advantage and disadvantages. They are the most common source for raising capital. Being one ownership fund, and another debt fund, corporates use both of them based on their requirements.
This article has been a guide to the Shares vs. Debentures. Here we also discuss the top differences between Shares and Debentures along with infographics and comparison table. You may also have a look at the following articles –