Distinguish between a debenture and a share. Why is debenture known as loan capital? Explain.
Distinguish between a debenture and a share. Why is debenture known as loan capital? Explain.
Basis of Difference
Shares
Debenture
1. Owner or Creditor
Share holders are the owners since shares forms a are part of owned capital
Debenture holder are Creditors since debentures are a part of loan
2. Voting Rights
Share holders have the voting rights
Debenture holders do not have any voting rights.
3. Returns
Share holders are entitled for returns in the form of dividend.
Debenture holders are entitled for returns in the form of interest.
4. Rate of Return
The rate of dividend is not fixed and varies from year to year.
The rate of interest is fixed and do not vary from year to year.
5. Obligations of Return
Dividend is appropriation of profit. Dividend will not be paid if losses are incurred by the company
Interest is charged against profit, interest is payable even if there is no profit.
6. Repayment of Amount
The amount of share is not returned during the life time of the company
The amount of debenture is returned according to the term of issue.
7. Issue
The issue of shares at discount need adherence to the restrictions imposed by the Section 79 of the Company Act.
There are no such restrictions for issuing debentures on discount.
8. Conversion
Shares cannot be converted into debentures.
Debentures can be converted into shares.
9. Risk
Shares are more risky than debenture as these are unsecured.
If debentures are secured against asset, the risk involved is the minimal.
10. Repayment Priority
Payment to the share holders is made after settlement of all external liabilities, i.e. after debenture holders.
Payment to the debenture holders is made before the share holders.
Issue of debentures implies incurring long-term indebtedness. Generally, a company issues debentures for acquiring long-term borrowings to achieve its long-run targets and growth. Like the owner’s capital, interest is also payable on the principal amount of the debenture. The interest paid is regarded as an expense for the company and is deductible under Income Tax Act. Therefore, debentures are also known as loan capital because they are redeemable after a long period of time.
| Basis of Difference | Shares | Debenture |
| 1. Owner or Creditor | Share holders are the owners since shares forms a are part of owned capital | Debenture holder are Creditors since debentures are a part of loan |
| 2. Voting Rights | Share holders have the voting rights | Debenture holders do not have any voting rights. |
| 3. Returns | Share holders are entitled for returns in the form of dividend. | Debenture holders are entitled for returns in the form of interest. |
| 4. Rate of Return | The rate of dividend is not fixed and varies from year to year. | The rate of interest is fixed and do not vary from year to year. |
| 5. Obligations of Return | Dividend is appropriation of profit. Dividend will not be paid if losses are incurred by the company | Interest is charged against profit, interest is payable even if there is no profit.
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| 6. Repayment of Amount | The amount of share is not returned during the life time of the company | The amount of debenture is returned according to the term of issue. |
| 7. Issue | The issue of shares at discount need adherence to the restrictions imposed by the Section 79 of the Company Act. | There are no such restrictions for issuing debentures on discount. |
| 8. Conversion | Shares cannot be converted into debentures. | Debentures can be converted into shares. |
| 9. Risk | Shares are more risky than debenture as these are unsecured. | If debentures are secured against asset, the risk involved is the minimal. |
| 10. Repayment Priority | Payment to the share holders is made after settlement of all external liabilities, i.e. after debenture holders. | Payment to the debenture holders is made before the share holders. |
Issue of debentures implies incurring long-term indebtedness. Generally, a company issues debentures for acquiring long-term borrowings to achieve its long-run targets and growth. Like the owner’s capital, interest is also payable on the principal amount of the debenture. The interest paid is regarded as an expense for the company and is deductible under Income Tax Act. Therefore, debentures are also known as loan capital because they are redeemable after a long period of time.
