Distinction between Shares and Debentures

A share represents ownership in a company. A shareholder is a part-owner of the company, and the money they contribute becomes part of the owned capital (equity). A debenture, on the other hand, is simply a written acknowledgement of a debt. A debentureholder is a creditor of the company, and the money they lend becomes part of the borrowed capital. This is the most fundamental distinction between the two.

Return: Dividend vs. Interest

The return on shares is called dividend. The rate of dividend is not fixed — it varies from year to year depending on the company's profits. The board of directors recommends a dividend, and shareholders approve it. Dividend is an appropriation of profits, meaning it is paid only out of profits after all expenses have been met.

The return on debentures is called interest. The rate of interest is fixed and stated on the debenture certificate. Interest is a charge against profits, meaning it must be paid regardless of whether the company earns a profit or incurs a loss. If the company fails to pay interest, debentureholders can take legal action.

Repayment

The amount of share capital is normally not returned to shareholders during the life of the company. Shares can be redeemed only under specific conditions (e.g., redeemable preference shares) or when the company is wound up.

Debentures are issued for a fixed period. On the expiry of that period, the company is legally bound to repay the principal amount to the debentureholders.

Voting Rights

Shareholders are the owners of the company and enjoy voting rights in the general meetings of the company. They can vote on matters like the appointment of directors, declaration of dividends, and amendments to the company's constitution.

Debentureholders are creditors and do not have voting rights. They cannot participate in the management or decision-making of the company.

Security

Shares are not secured by any charge on the assets of the company. If the company fails, shareholders are paid only after all creditors have been settled.

Debentures are generally secured by a charge (fixed or floating) on the company's assets. If the company defaults on interest or principal repayment, debentureholders can sell the charged assets to recover their money.

Convertibility

Shares cannot be converted into debentures.

Debentures can be converted into shares if the terms of issue specifically provide for it. Such debentures are called convertible debentures. This conversion can be at a predetermined time and ratio.