Capital Market Instruments

5. Capital Market Instruments

The capital market functions through a defined set of long-term instruments — some representing OWNERSHIP capital and some representing BORROWED (debt) capital:

1. Equity Shares. Represent part-ownership of a company; an equity shareholder is a genuine member/owner of the company, entitled to vote at general meetings and to a share of profit (dividend) only AFTER all other claims (interest on debt, preference dividend) have been met, and only if the company's board decides to declare a dividend at all. Equity shares carry no fixed rate of return and no promise of capital repayment, and correspondingly carry the highest risk — but also the potential for the highest return, both through dividend and through a rise in the share's own market price.

2. Preference Shares. Also represent ownership capital, but with two specific PREFERENCES over equity shares: a preference shareholder is paid dividend, at a fixed, pre-decided rate, BEFORE any dividend is paid to equity shareholders, and, if the company is wound up, is repaid capital before equity shareholders. In exchange for this preference, a preference shareholder ordinarily has no voting right on general company matters. (Preference shares may further be cumulative/non-cumulative, redeemable/irredeemable, participating/non-participating, and convertible/non-convertible — the specific variety determines exactly how, and how much, extra benefit the preference shareholder gets beyond the basic fixed dividend.)

3. Debentures. A debenture is an acknowledgement of a company's DEBT, issued under the company's seal, promising to pay a fixed rate of interest at regular intervals and to repay the principal amount on a stated redemption date, regardless of whether the company has earned a profit that year. A debenture holder is a CREDITOR of the company, not an owner, and therefore has no voting right, but ranks ahead of every shareholder (both preference and equity) in the event of the company's winding up. Debentures may be secured (backed by a charge on the company's assets) or unsecured, and convertible (into equity shares after a stated period) or non-convertible.

4. Bonds. Function on the same basic principle as a debenture — a fixed-interest, long-term debt instrument promising repayment of principal on maturity — but the term "bond" is more commonly used for debt instruments issued by the government or public-sector undertakings (for example, government bonds financing public projects), while "debenture" is the term more commonly used for debt instruments issued by private companies.

| Basis | Equity Shares | Preference Shares | Debentures / Bonds |

|---|---|---|

| Nature of capital | Ownership | Ownership (with preferences) | Borrowed (debt) |

| Holder's status | Owner/member | Owner/member, with preferential rights | Creditor |

| Return | Dividend, only if declared; no fixed rate | Fixed-rate dividend, paid before equity | Fixed-rate interest, payable regardless of profit |

| Voting right | Yes | Ordinarily none | None |

| Repayment of capital | No fixed date; only on winding up, last priority | On winding up, before equity, after debt | On a stated redemption date, ahead of all shareholders | …