Difference between Shares and Debentures

What Are Shares?

The authorized capital of a Company is split up into units with a definite face value called Shares. Section 2(84) of the Companies Act, 2013 defines a share as “a share in the share capital of a company and includes stock.”

A share is the interest of the shareholder in the Company measured by a sum of money for the purpose of liability and of interest. It also consists of other rights given by the Articles.

A public company can issue various types of shares in order to tap the savings of people with different habits regarding the investment of the savings.

Classes of Shares

1. Preference Shares

Preferences Shares are those shares that carry certain priorities in regard to the payment of dividends and return on capital and are subject to certain limitations in regard to voting rights.

A preference share is given the right of priority in respect of payment of dividend and in respect of return of capital in the case of the company being wound up.

These shares are considered best from the point of view of safe investment, permanent income, and less risk.

There are the following kinds of preference shares:

(a) Cumulative Preference shares

 They are paid dividends at a fixed rate. if due to any reason the dividend is not paid in a particular year it will be carried forward to the next year in case of Cumulative preference shares.

(b) Non-Cumulative Preference shares

They are also paid dividends at a fixed rate. But they can be paid dividends out of the profits of the current year only.

(c) Participating Preference shares

A participating preference share is a share that carries the right of sharing profit left after paying preference and equity dividend at a fixed rate.

(d) Non-Participating Preference share

Non-Participating preference shares are those which are not entitled to share in the surplus profit. They are entitled to a fixed rate of dividend only.

2. Equity Shares

Equity shares are those shares that carry no special rights in respect of annual dividend and return of capital after the company is wound up.

They are paid dividends out of the net profits of the company after the preference shareholders have been paid a fixed rate of dividends. In other words, there will be no fixed rate of dividend to be paid to the equity shareholders.

Kinds of Equity Shares

1. Equity Shares with Voting Rights

The holder of Such equity shares has normal voting rights on every resolution placed before the company at any General Meeting. His voting right will be in proportion to his share in the paid-up equity capital of the company.

2. Equity Shares with Differential Rights

The holders of such equity shares will have differential rights as to dividend, voting, or otherwise in accordance with rules and subject to conditions as may be prescribed by the central government.

Debentures

A debenture is a certificate issued under the common seal of the company. It is an instrument that acknowledges the debt of the company in writing. It specifies the nominal value of debenture, the rate of interest to be paid,  periodicity of payment, and terms of redemption.

 Section 2(30) of the Companies Act, 2013 define debenture as, “Debenture includes debenture, stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.”

Types of Debentures

1. From Security Point of View

(a) Secured Debentures: When debentures are secured by a mortgage or a charge on the property of the company, then such debentures are called a mortgage or secured debentures. The debentures may be secured through a fixed charge or a floating charge.

(b) Unsecured Debentures: Unsecured debentures are those that have no security attached to them. Such debentures are not too very common these days, so much so that, unless otherwise stated, a debenture is presumed to be secured. However, a floating charge may be created on these debentures by default.

2. From Redemption Point of View

(a) Redeemable Debentures: Redeemable debentures are those that will be repaid by the company at the end of a specified period during the existence of the company, either in lump- sum or in installments.

(b) Irredeemable Debentures: Irredeemable debentures are those that are not repayment during the lifetime of the company. These are repayable only at the time of liquidation of the company.

3. From Convertibility Point of View

(a) Convertible Debentures: Convertible debentures are convertible into equity shares or other Securities at the option of the company or at the option of the debenture holders, as the case may be.

A convertible debenture is of two types. Partly Convertible debentures are those debentures where only a portion of the amount of debenture is convertible into shares or other securities at a specified time and the remaining portions of debenture are redeemable on agreed terms.  

A fully convertible debenture is the debenture where the full amount can be converted into equity shares of the company at agreed terms and conditions.

(b)Non-Convertible Debenture: Non-Convertible debentures are those debentures where the holders have no right to convert them into equity shares or any other securities. Most debentures issued by companies fall in this category.

Difference between Share and Debenture

Basis of Distinction               Share         Debenture
ReturnA shareholder gets a dividend from the company.

The dividend is paid only when there are profits.

The rate of dividend may fluctuate from year to year depending upon the profits earned and the decisions of the directors.

Besides, payment of dividends is an appropriation out of profits.
Debenture constitutes a loan and as such, they are the creditors of the company.
PaymentPayment of shares cannot be made during the lifetime of the company except redeemable preference shares.

However, after the introduction of ‘Buy-Back of Securities,’ the company can buy its own shares.
The amount of debentures must be returned according to the terms of the issue.
Order of RepaymentIn the case of the winding up of the company, the payment of share capital is made after the repayment of debentures.Payment of debenture is made before the payment of share capital.
ConvertibilityEquity share can never be convertible.Debentures may be convertible.
Voting RightShare confers on its holder the right to participate in and vote at Company’s meetings.A holder of debenture neither possesses any voting right in the company’s meeting nor can he participate in the meetings unless in very extraordinary situations.

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