Question

Distinguish between a debenture and a share. Why debenture is known as loan-capital? Explain.

Answer 1

The following are the difference between Shares and Debentures

$$\begin{array}{ccc}\text{Basis of}& \text{Shares}& \text{Debentures}\\ \text{Difference}& & \\ \text{Nature}& \text{Share holders are the owners of}& \text{Debenture holders are Creditors}\\ & \text{the company.}& \text{of the company.}\\ \text{Voting Rights}& \text{Share holders have the voting}& \text{Debenture holders do not have}\\ & \text{rights.}& \text{any voting rights.}\\ \text{Returns}& \text{Share holders are entitled for}& \text{Debenture holders are entitled for}\\ & \text{returns in the form of dividend,}& \text{returns in the form of interest,}\\ & \text{which may vary from year to year.}& \text{which is fixed.}\\ \text{Conversion}& \text{Shares cannot be converted}& \text{Debentures can be converted}\\ & \text{into debentures.}& \text{into shares.}\\ \text{Obligations of}& \text{Dividend is appropriation of profit.}& \text{Interest is charged against profit.}\\ \text{Return}& \text{Dividend will not be paid if losses}& \text{interest is payable even if there is}\\ & \text{are incurred by the company.}& \text{no profit.}\\ \text{Risk}& \text{Investment in Share is}& \text{If debentures are secured against}\\ & \text{unsecured.}& \text{asset, they are less risky as the}\\ & & \text{risk involved is secured against}\\ & & \text{the assets.}\\ \text{Issue}& \text{The issue of shares at discount}& \text{There are no such restrictions for}\\ & \text{need adherence to the restrictions}& \text{issuing debentures on discount}\\ & \text{imposed by the Section 79 of the}& \\ & \text{company Act.}& \\ \text{Payment at}& \text{Payment to the share holders is}& \text{Payment to the debenture}\\ \text{Liquidation}& \text{made after settlement of all}& \text{holders is made before the share}\\ & \text{external liabilities, i.e., after}& \text{holders.}\\ & \text{debenture holders.}& \end{array}$$