Difference Between Shares and Debentures

Publication Date :

25 Feb, 2019

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Shares vs Debentures

The corporate world has its own set of capital structure. They have a highly complex capital format, including share capital, debt fund, angel capital, reserves, surplus, etc. Each component of capital structure has its peculiarities, making it suitable for its situations and circumstances.

Shares vs Debentures

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 instrument 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 Debenture.

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

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 dividend 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.
Shareholders 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 liquidation, 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 share 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 liabilities.

Comparative Table

Basis	Shares	Debentures
Structure	Shares are the ownership capital of the company.	Debentures are the debt for the company.
Dividend Right	Shares 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 Right	Shareholders have voting right in the annual general meeting of the company.	Debenture holders do not have the right to vote in the general meeting.
Conversion	Shares 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 holder	From 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.
Lien	Shareholders 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/Creditor	Shareholders are the Owners of the company.	Debenture holders are the creditor of the company.
Right at the time of liquidation	Shareholders 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.
Leverage	Shares do not give any leverage benefit to the company.	Debentures give the leverage benefit to the company.
Compulsion to issue	For 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 return	For the company, it is not mandatory to declare a dividend.	For the company, it is mandatory for the company for payment and repayment of interest and debt.
Example	An example is equity share capital and preference share capital.	Examples are non-convertible debentures, convertible debentures, 2^nd charge debentures, etc.
Disclosure in financial statement	The share capital is to be disclosed under "Shareholders funds "on equity and liabilities side in the balance sheet.	Debentures are to be disclosed under long term borrowings under Non-Current Liabilities 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.