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.

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.

Shares vs. Debentures Infographics

Differences Between Shares and Debentures

  • The share capital is the company’s owned capital, common stock, and total capital, while Debenture is the company’s acknowledgment to the debt provider.Shares are compulsory for every company to issue, while debentures are not mandatory to be issued by every company.Shares are entitling for the dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more 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 company’s assets.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.read more 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.read more, 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 be converted into any form of capital structure, while debentures can be converted into shares or other ownership capital.For the company, it is not mandatory to return the share capital to the shareholders. In contrast, the company must make the payment and repayment of interest and principal to the debenture holders..Examples of the shares are equity share capital or preference sharePreference ShareA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more capitals, while an example of the debentures is convertible Debenture, non-convertible debentures, etc.The shareholder’s fund is to be disclosed under the shareholder’s fund in the 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). read more.

Comparative Table

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 –

  • Shares vs Mutual FundsShare Capital FormulaIssued vs Outstanding Shares – DifferencesTreasury Shares Definition