Shares vs Debentures
A share represents ownership in a company and carries a residual claim. A debenture represents a loan to the company and carries a fixed contractual claim to interest and repayment.
The quick answer
Shareholders own the company and are paid last; debenture holders lend to it and are paid first. Dividend is an appropriation payable only out of profits; interest is a charge payable regardless.
Side-by-side comparison
| Basis | Shares | Debentures |
|---|---|---|
| Nature of holder | Owner of the company | Creditor of the company |
| Return | Dividend — not guaranteed | Interest — contractually fixed |
| Payable out of | Profits only | Payable whether or not there are profits |
| Voting rights | Equity shares carry voting rights | No voting rights |
| Repayment priority on winding up | Paid last, after all creditors | Paid before shareholders |
| Security | Unsecured by nature | May be secured by a charge on assets |
| Accounting treatment | Shown under equity | Shown as a borrowing under liabilities |
The exam angle
Convertible debentures are the frequently examined hybrid. Until conversion they remain a liability with a fixed claim; on conversion they become equity. State the position both before and after conversion.
Related comparisons
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Talk to usCan a company issue debentures with voting rights?
No. Debentures carry no voting rights, since a debenture holder is a creditor rather than a member of the company.
Is dividend on preference shares a charge or an appropriation?
It remains an appropriation of profit, not a charge, even though preference shares carry a preferential right to dividend ahead of equity shareholders.
Which is cheaper for the company?
Debt is typically cheaper because interest is a deductible expense and the lender's risk is lower — the basis of the tax shield discussed in Financial Management.
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