Difference Between Shares and Debentures

Updated on April 8, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

The key difference between Shares vs. Debentures is that Shares are the capital that the shareholders in the company own. It gives the right to vote in the matters of the company and claim their share in the company’s profits. At the same time, debentures are the debt instruments issued by the company to raise funds. It has a fixed interest rate with cumulative and non-cumulative features redeemable after a fixed interval, either in installment or lump sum.

Shares vs Debentures

The corporate world has its own set of capital structure. They have a highly complex capital format, including share capital, debt fundDebt FundDebt fund are investments, such as a mutual fund, closed-end fund, ETF, or unit investment trust (UTI), that primarily invest in fixed-income instruments like bonds or other types of a debt security for returns.read more, angel capital, reserves, surplus, etc. Each component of capital structure has its peculiarities, making it suitable for its situations and circumstances.

What is Share?

Shares are the ownership capital that the owners of the company hold. The holder of the shares is considered the company owner 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.

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What is Debenture?

Debentures are the company’s acknowledgment of 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.read more 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.

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Let us take an example of DebentureExample Of DebentureDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. In return, investors are compensated with an interest income for being a creditor to the issuer.read more.

The promoter group of XYZ floats ABC Ltd by issuing the equity share capital of $500 million by issuing shares of 50 million each for $10. Also, they bought machinery and equipment by issuing non-convertible Debentures (NCDs) of $300 crore.

Here, Equity share capital is the basic capital owned by the public and promoters. While NCDs are the debt taken from the public is an example of the Debenture.

Explanation of Debenture in Video

 

Shares vs. Debentures Infographics

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Differences Between Shares and Debentures

Comparative Table

BasisSharesDebentures
StructureShares are the ownership capital of the company.Debentures are the debt for the company.
Dividend RightShares 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 RightShareholders have voting right in the annual general meeting of the company.Debenture holders do not have the right to vote in the general meeting.
ConversionShares 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 holderFrom 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.
LienShareholders 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/CreditorShareholders are the Owners of the company.Debenture holders are the creditor of the company.
Right at the time of liquidationShareholders 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.
LeverageShares do not give any leverage benefit to the company.Debentures give the leverage benefit to the company.
Compulsion to issueFor 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 returnFor the company, it is not mandatory to declare a dividendDeclare A DividendDividend declared is that portion of profits earned that the company’s board of directors decides to pay off as dividends to the shareholders of such company in return to the investment done by the shareholders through the purchase of the company’s securities.read more.For the company, it is mandatory for the company for payment and repayment of interest and debt.
ExampleAn example is equity share capital and preference share capital.Examples are non-convertible debentures,  convertible debentures, 2nd charge debentures, etc.
Disclosure in financial statementThe share capital is to be disclosed under “Shareholders funds “on equity and liabilities side in the balance sheetLiabilities Side In The Balance SheetAccounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial statements.read more.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. read moreThe 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. read moreThe 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. read moreiabilitiesIabilitiesThe 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. read more in equity and liabilities side in the balance sheet.

Conclusion

Like the two sides of the coin, shares and debentures have advantages and disadvantages. They are the most common source for raising capital. With one ownership fund and another debt fund, corporates use both 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, infographics, and a comparison table. You may also have a look at the following articles –

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