We understand that in order to conduct business, we need money. This money is commonly referred to as capital. When a firm requires a large sum of money, it sells shares to the general public. The money raised by issuing shares is referred to as the company’s share capital.
When a corporation borrows money in the form of debentures, we don’t count it as part of the firm’s share capital. A debt instrument is a debenture. Let’s look at the distinction between shares and debentures.
- What is a share?
- Types of Shares
- What is a Debenture?
- Features of Debenture
- Types of Debentures
- Difference Between Shares and Debentures
- Share vs Debenture: Which is better?
- Final Thoughts
- Frequently Asked Questions
The value of shares is merely nominal. We have clearly defined shares in the following section.
Shares definition and meaning
A share is a share in a company’s share capital, which comprises stock, according to Section 2(84) of the Companies Act, 2013. A share is a type of investment instrument. They are the lowest unit of a fixed amount of a company’s capital, as defined by us.
Shares represent a right to take part in the gains (profits) made by the issuing company. It also holds claims in the assets of the company with liquidation. Companies sold shares in the stock market to raise funds. A person who purchases a share of a company gets a portion of ownership of that company.
A share is a movable property that is also a good. Stocks and shares are considered goods in India. Even if shares are movable property, we can only transfer them according to the articles of the corporation.
A business can only issue two classes of shares, according to the Companies Act of 2013. There are two sorts of shares:
- Equity Shares: A company’s equity owners are not entitled to a fixed dividend rate or amount. They do, however, have voting rights on all issues that affect the corporation. A company’s equity shares are not redeemable.
Equity shares can alternatively be defined as shares that do not have a preference.
- Preference Share: We look for preference shares with a fixed dividend rate and amount. A corporation pays preference shareholders a dividend before paying equity shareholders.
The voting rights of preference shareholders are limited or restricted. A company’s equity shareholders have the right to vote on anything. Preferential shareholders are guaranteed a preferential dividend under the rules.
What is a Debenture?
Let us define debenture and the various types of debentures.?
Debentures definition and meaning
Debentures are also defined as a type of bond issued by a firm with a fixed rate of interest. Debentures are frequently secured or levied against the issuing company’s assets.
If a business wants to expand and improve its operations or fund projects but does not want to increase its share capital, it borrows money from the public market. A firm issues debentures, which are the most frequent method of acquiring funds from the general public.
Let us now look at the formal definition of debentures as provided by the government.
A debenture is defined as follows in Section 2(30) of the Companies Act of 2013:
Debentures include debenture stock, bonds, and any other company instrument evidencing a debt, whether or not the debt is secured by the company’s assets.
Features of Debenture
The following are some of the most important characteristics of a debenture:
1. Every debenture has a redemption date that is set in stone. The principal and interest repayments specified in the debenture are set.
2. Debentures place a lien on the assets of the entity issuing the debenture.
A pari passu clause is usually included in the terms and conditions of debentures. If a corporation is unable to repay the entire amount or obligation, debenture holders will be compensated proportionally.
Types of Debentures
We categorize shares and debentures in a variety of ways. Debentures are typically divided into six categories. They can be any of the following:
- Bearer Debentures are a type of negotiable instrument that can typically be transferred by delivery. Bearer debentures are those that are paid to the bearer. The interest on bearer debentures is normally paid with attached coupons. Bearer debenture names do not appear on corporate records.
- Registered Debentures: Individuals whose names are on the company’s debenture-holder register are paid registered debentures.
- Irredeemable Debentures: Because the Companies Act of 2013 does not specify irredeemable debentures, they can no longer be issued. Irredeemable debentures were previously covered by Section 120 of the Companies Act of 1956. Debentures that are perpetual or irredeemable do not have to be repaid. Companies are no longer able to issue new irredeemable debentures.
- Redeemable Debentures: Redeemable debentures are issued by a company for a set period of time. If a corporation pays back the debenture-holder after the specified period has expired, its properties/assets may be liberated from the mortgage (and/or charge). Only redeemable debentures are permitted under the Companies Act of 2013.
- Debentures, Secured and Naked: It is common knowledge that debentures are more secure than company shares. A charge on a company’s assets is frequently used to secure its debentures. It is also possible to use the mortgage. Unsecured or Naked debentures, on the other hand, are those that are not secured by a charge on the company’s assets.
- Convertible Debentures: A company’s convertible debentures can be exchanged into equity or preference shares at predetermined exchange rates after a set length of time. A convertible debenture that has been converted into a share cannot be converted back into the company’s stock.
Debentures and shares are not the same thing. The following are the primary points of distinction between shares and debentures:
- A company’s member is one of its shareholders. A debenture holder is not a corporation member.
- Interest earned on debentures is treated as a business expense. As a result, we enable it to be deducted from the company’s earnings. Dividends on shares are not allowable as a deduction because they are considered profit appropriation.
- Only when the company makes money does a shareholder make money. Dividends are paid only from the company’s profits. A company’s debenture holders are all entitled to a fixed interest rate.
- Shareholders face greater risk, whereas debenture holders receive guaranteed returns. Debentures are one of the most secure financial products available.
- Debentures can be converted into shares, however shares of a firm cannot be converted into debentures of the same company.
- Debenture holders receive preferential treatment over shareholders in the event of a bankruptcy. When the company has settled all of its outstanding debts and dues, shareholders are usually paid.
- The value of a company’s stock is determined by its stock market performance. They aren’t locked up. Debentures are risky, but their repayment is guaranteed.
- A company’s shares typically yield substantial returns. Debentures offer moderate to poor investment returns.
It is dependent on the prospective investor’s risk appetite. A company can raise funds through both shares and debentures. The distinction, however, is in the favorable payment treatment. Debentures are a superior investment option for low-risk investors, whereas equity shares are a better option for high-risk investors.
Shares vs. Debentures is a personal preference. Both shares and debentures have advantages and disadvantages. An investor might select between the two depending on his financial needs and objectives. You might also combine the two in your financial portfolio. Nonetheless, we should base all of our investing decisions on sound financial counsel and analysis.
Frequently Asked Questions
How do we classify debentures?
Debentures are divided into six categories. Bearer Debentures, Registered Debentures, Permanent or Irredeemable Debentures, Redeemable Debentures, Secured and Naked Debentures, and Convertible Debentures are the different types of debt instruments.
The distinction is in voting rights and repayment treatment preference. Equity shares provide voting rights as well as ownership in the company. Debentures have a set repayment schedule.
There are two sorts of shares: equity and preferential. Voting rights or differential rights may be included in equity shares.