Businesses frequently raise capital using a variety of financial instruments to finance their operations and growth. Debentures and shares are two examples of typical financial instruments. While both signify ownership in the business, each has a distinctive function and confers unique rights to the holder.
Investors and stakeholders alike must comprehend the distinctions between debenture holders and shareholders.
This article tells you the definitions of shares and debentures and emphasises the differences between shareholders and debenture holders.
Meaning of Debenture
Section 2(30) of the Companies Act, 2013, provides the definition of the term “debenture”.
Debentures are long-term debt instruments issued by companies to raise capital, typically in the form of bonds or loans secured by company assets. They offer fixed interest rates and can be issued with or without the creation of a charge on company assets.
Debenture Stock: This refers to a type of long-term debt instrument issued by a company to raise funds. Debenture stock represents a loan taken by the company from the public or investors, and it acknowledges the company’s debt obligation to the debenture holders.
Unlike regular debentures, debenture stock is not issued with specific maturity dates but for a perpetual or long-term period.
Bonds: Bonds are another form of long-term debt securities issued by companies to raise capital. They are similar to debentures but may have specific features, such as more extended maturity periods and fixed or variable interest rates, and may be traded in the secondary market.
Any Other Instrument Evidencing a Debt: This part of the definition covers any other financial instrument or security issued by a company that represents a debt obligation.
It could include instruments with different names or characteristics as long as they evidence a debt owed by the company.
Meaning of Shares
As per section 2(84) of the Companies Act, 2013, the term “share” is defined as follows.
A share is a unit of ownership in the share capital of a company. When a company is incorporated, its capital is divided into smaller units, and each unit is known as a share.
These shares represent ownership rights in the company, and individuals or entities who hold these shares are referred to as shareholders.
Difference Between Debenture Holder and Shareholder
1. Shareholders are considered the company’s owners, whereas debenture holders are considered the company’s creditors as they are the lenders of the company.
2. Shareholders have the right to be a part of the company’s decision-making process. In contrast, debenture holders cannot take part in the company’s decision-making process.
3. Shareholders have voting rights, which means they can vote in the company’s meetings. In contrast, debenture holders have no voting rights and can’t vote in company meetings.
4. Shareholders have the right to receive dividends, which are a part of the company’s profit. In contrast, debenture holders have the right to receive interest since they are lenders to the company.
5. The company may or may not pay dividends to the shareholders even if the company is generating profit. In contrast, debenture holders will receive interest whether the company generates profit or loss.
6. In the event of the winding up of the company, shareholders are not given priority over debenture holders in terms of payment.
Conclusion
The functions shareholders and debenture holders play in a company’s financial structure differ. Debenture holders are debtors who get set interest payments, whereas shareholders are owners who can vote and receive possible dividends.
Investors must comprehend these variations to make wise choices depending on their financial objectives and risk tolerance.
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