Introduction:
Every business requires capital for starting a business. For starting a large scale organization there is a need for huge amounts of capital. For raising a capital company uses various sources of funds like share capital by issuing shares to public, debt capital by issuing debentures, term loans from banks, etc.
Out of all sources of funds, companies prefer shares and debentures more. People who are interested in investing in shares and debentures are increasing every day showing a rapid growth in the capital market. There are many differences between Shares and Debentures, they are as follows.
SHARES
The share of a company can be defined as a small part of the capital. The total capital which is required by the company is divided into units of equal value, These units are called as Shares.
TYPES OF SHARES
Shares are majorly divided into two types, they are
EQUITY SHARES: Equity shares are the shares which are irredeemable. The rate of dividend on equity shares is not fixed and vary according to the policies of the management of the company. Equity shareholders receive dividend only after the preference shareholders are paid dividends.
PREFERENCE SHARES: Shares which have a fixed rate of dividend and paid dividend before the equity shareholders are paid dividend. Also the preference shareholders carry a preference right over the equity shareholders in terms of payment of dividend and in the event of winding up of the company however, type of shares have no voting rights in the management of the company.
DEBENTURES
A company resort to the borrowing of money from different sources like commercial banks, finance institutions and also from the public. A debenture is defined as the sum of money raised by the company in the form of borrowing from general public. Debenture holders are literally called as “Creditors” to the company. Debenture holders are paid irrespective of the company’s profits or loss. They don’t have any voting rights regarding the management of the company.
DIFFERENCE BETWEEN PREFERENCE SHARES AND DEBENTURES
| Basis for comparison | Preference shares | Debentures |
| Owned/debt fund. | Preference shares are owned funds of the company and form as capital part in the balance sheet of the Company. | Debentures are borrowed funds of the company and form as debt capital in the balance sheet of the Company |
| Form of Return | Preference shareholders get return in form of dividend | Debenture holders get return in form of interest. |
| Payment of Return | Dividend shall only be paid only when the company is earning profits. | Interest is to be paid irrespective whether the company is in profits or losses. |
| Allowable deduction. | Dividend is an appropriation of profit and so it is not allowed as deduction from the profit. | Interest is a business expense and so it is allowed as deduction from profit. |
| Security for payment | NIL. | Yes the debentures can be secured. |
| Voting Rights | Generally preference shareholders do not carry voting rights, however if the dividend is not paid for 2 years they acquire the rights vis-à-vis equity shareholders | Debenture holders never carry voting rights even if not interest is paid by the Company |
| Conversion | The preference shares can be converted into equity shares. | Debentures can be converted into equity or preference shares of the company. |
| Repayment. | The preference shareholders are to be repaid back with the money after the term of redemption. | The debenture holders are to be repaid back with the money after the term of redemption. |