Secretarial Practice · Ch 2 — Sources of Corporate Finance
Distinction: Shares and Debentures, Equity and Preference Shares, Owned and Borrowed Capital
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Distinction: Shares and Debentures, Equity and Preference Shares, Owned and Borrowed Capital
Bringing the chapter's main classifications together in one place makes it much easier to answer a distinguish-type question accurately, since these three comparisons are among the most frequently tested in Maharashtra HSC Secretarial Practice examinations.
Shares and Debentures
| Basis | Shares | Debentures |
|---|---|---|
| Meaning | A unit of the company's own share capital — an ownership security | A certificate of loan taken by the company — a creditorship security |
| Status of holder | Owner/member of the company | Creditor of the company |
| Nature of capital | Owned, permanent capital, not repaid during the company's lifetime | Borrowed, temporary capital, generally repaid after a fixed period |
| Return | Dividend — fluctuating for equity, fixed for preference — payable only out of profit | Interest, fixed, payable irrespective of profit |
| Voting right | Ordinarily carries voting rights (equity shares) | No voting rights at all (Section 71(2)) |
| Security | Unsecured — no charge on company assets | May be secured by a charge on company assets |
| Time of issue | Usually issued at the company's formation or early growth stage | Usually issued at a later stage, once the company has assets to offer as security |
| Priority on winding up | Paid last, out of whatever residual assets remain | Paid ahead of shareholders, as a liability of the company |
Equity Shares and Preference Shares
| Basis | Equity Shares | Preference Shares |
|---|---|---|
| Meaning | Shares that are not preference shares | Shares carrying preferential rights to dividend and repayment of capital |
| Dividend | Fluctuating rate, dependent on profit | Fixed rate, paid before equity shareholders |
| Repayment on winding up | Paid last, after preference shareholders | Paid ahead of equity shareholders |
| Voting rights | Normally carry full voting rights | Normally no voting rights, except on matters affecting their own class |
| Redemption | Irredeemable during the company's lifetime | Always redeemable — irredeemable preference shares cannot be issued (Section 55(1)) |
| Face value | Comparatively low (commonly ₹10 or ₹1) | Comparatively higher (commonly ₹100) |
| Bonus / rights issue | Available to equity shareholders | Not available to preference shareholders |
| Nature of investor attracted | Investors willing to take risk for higher potential reward | Cautious investors seeking safety and steady return |
Owned Capital and Borrowed Capital
| Basis | Owned Capital | Borrowed Capital |
|---|---|---|
| Meaning | Capital contributed by the company's own shareholders, or generated internally (retained earnings) | Capital raised by the company as a loan from outsiders |
| Sources | Equity shares, preference shares, retained earnings | Debentures, bonds, public deposits, bank credit, financial-institution loans, trade credit |
| Return | Dividend, payable only out of profit, if declared | Interest, a fixed contractual charge, payable irrespective of profit |
| Repayment | Permanent — repaid only on winding up | Temporary — repaid on or by an agreed date |
| Control | Owners (equity shareholders) ordinarily control the company | Lenders have no control over the company's management |