Investment in Shares and Debentures is quite prominent in the last decades, It has created a dominant position in the youth taking interest in the market these days. People earlier used to spend their spare money on these two but these days people are investing their hard-earned money on buying shares and debentures.

Shares and Debentures are the two corporate terminologies. Most of the people are aware of the shares but more confused about the Debentures. Both shares and Debentures can be Listed.    

Share vs Debentures

The difference between Shares and Debentures is that Shareholders are the owners of the company and Debentures holders are the lender in the company or we can say debtors in the company. In both of them, people invest money to get high returns as these days saving and fixed deposit interests are not worthy. 

Shares mean the sharing capital invested in a company to run the business successfully. Holder of the specific share in the company has particular ownership in the company. Share are usually for 2 types Preference and Equity. Shares are the smallest portion of the capital division of the company. 

Debentures are the long-term debt investment received by the company from any external person. It allows a pre-defined interest payable to the Debenture holder.  Debentures are of 2 types whether secured or unsecured. These are termed as the borrowed capital of the company to be utilized for business.

Comparison Table Between Shares and Debentures

Parameters of ComparisonSharesDebentures
MeaningShares are the Capital of the company.Debentures are the kind of loan taken by the company.
OutputShareholders received the dividend on the Shares which are not fixed.Debenture holders received the fixed interest on Debentures.
Voting RightsShareholders enjoy voting rights in a company.Debenture Holders do not have any voting rights. 
ConversionShares can be consolidated or subdivided. Debentures can be coveted to share on redemption.  
Trust DeedShareholders Agreement is there in case of Issue of shares. Trust Deed is prepared in the case of Debentures. 

What is Shares?

The term Shares refers to a minimal sub-division of the capital of the company. Person or entity holding shares are called Shareholders having voting rights and also termed as owners. Income received by the shareholders is called Dividends. Payment of dividends can only be made out of the profits of the current financial year. 

Only current year profits are considered for payment of Dividends not otherwise. There are 2 types of dividends are Final and Interim. Both of them are paid as per appropriation of profit. Once a dividend is declared- has to be paid anyway. 

The sale-purchase transaction of shares is the amount to capital gain tax as per the holding period. both Short term and long-term capital gain are applicable on shares as per the holding period. 

What is Debentures?

The term Debentures refer to a debt source of funding of a company. Interest is compulsory payable on the Debentures at a fixed rate. When debentures are issued to the public at large then a Trust deed is required to be created or executed. 

No matter whether the company has earned profits or not the interest on Debenture is required to be paid compulsory. Interest paid on Debentures is an expense for a company therefore allowable as a deduction in the hands of the company. 

Debentures are redeemable after fixed tenure and further converted into shares and there are certain types of debentures as per the Companies Act, 2013. In the event of the closure of the company, Debenture holders get priority over the shareholders of the company for repayment. 

Debentures do not carry over any voting rights like shares and funding sources of debentures are counted as borrowing of the company.

More Differences Between Shares and Debentures 

  1. Repayment: At the time of Winding-Up shares are repaid after all kinds of settlement whereas Debentures are repaid or redeemed on priority at the time of winding up. 
  2. Quantum: Dividends paid on shares are out of the appropriation of profit on the other hand Interest paid on Debenture is a charge against profit. 
  3. Deduction: Since the Dividend on shares is the appropriation of profit, therefore, no deduction benefit is available adversely Interest on Debenture is a charge against profit so Deduction benefit is available. 
  4. Status of Holder: The holder of shares is considered as the owner of the company and also called a promoter whereas the holder of Debenture is considered as a creditor of the company. 
  5. Charge: No Security charge is created on payment for shares whereas a Security charge is created in the case of Debentures. 

Conclusion

Both Share and Debentures are the Corporate terminologies and source of funding for a company or start-up. Where no compulsion of payment of dividend on shares is a good thing for company but payment of interest on Debentures is an obligation on a company.

Though Shares cannot be issued at a discount as per the provisions of the Companies Act, 2013 but no such legal compliance in case of issue of Debentures at a discount as per the provisions of Companies Act, 2013.

Refrences

By csannusharma

Annu Sharma is a qualified Company Secretary as well as a Certified CSR Professional and a Law graduate with rich experience of 4 years in secretarial, corporate legal affairs, management and corporate governance; in different industry sectors. Featured on Tax Guru.In, Compliance Calendar LLP and Blogger.com.