There are many ways a company, when it needs to raise capital to meet its various requirements, can get resources. It can obtain loans from banks and private lenders, issue debentures to public or can come up with an issue in the stock market to sell its shares. Investors who provide loan to the company are issued an instrument known as debentures under the seal of the company. It is an acknowledgement that the company owes the amount of money mentioned in the debentures to the lender and agrees to pay a specified sum of money as interest for the duration of the debenture. On the other hand, shares are part of the equity of the company and shareholders are in effect part owners in the company. Though both shares and debentures are liabilities of the company a debenture holder is a creditor to the company whereas shareholder is an owner in the company. There are many more differences that will be highlighted in this article.
The word debenture comes from the Latin word debere that means to borrow. It is a method to raise capital and the document that contains all the details of the contract between the company and the lenders is called debenture. The company agrees to repay the principal at the expiry of the period mentioned in the debenture and till that date agrees to pay an interest at a rate that is specified in the debenture. On the other hand, shares are just a part of the equity of the company and shareholders are owners of some part of the capital of the company. Thus the most notable difference between a debenture holder and a share holder is that while debenture holders are creditors to the company, shareholders are part owners in the company. Both are investors but the return on shares is called dividends whereas return on debentures is termed as interest. The rate of return on debentures is fixed during the period of the debenture whereas the rate of return on shares is variable as it is dependent upon the profit earned by the company. Whereas only dividends are paid by the company to shareholders in case of profit, the company has to pay the interest whether there is profit or no profit, and then at the end of the term of the debenture has to return the principal sum mentioned in the debenture.
It is possible to convert debentures into shares whereas shares cannot be converted into debentures. While a company can issue debentures at discount without any restriction, it has to follow many legal formalities before it can issue shares at discount. Mortgage debentures are a special case of debentures where to secure money, company mortgages its assets to the debenture holders. This is not possible in any circumstance in case of share.
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In brief: Difference Between Debentures and Shares • Debenture is considered as a part of loan while share is a portion of the capital • Income from debenture is called interest whereas income from shares is called dividends • Interest to debenture holders has to be paid even when there is no profit whereas dividends are declared only in case of profits • Rate of return on debenture is fixed and specified in the document whereas rate of return on share is variable and can be high or low depending upon financial performance of the company • Debentures are convertible whereas shares are non convertible • Creditors holding debentures have no voting rights whereas shareholders have voting rights
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