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Oct 29 2012

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Differences between Shares and Debentures

debentures, debenture, stock, common stock, preferred stock Shares and debentures are somewhat similar in nature and both of two them provide capital to business. Shares are considered as the residual parts of the business capital. Debentures are uniform part of the loan capital of a company and debenture are considered as loan financing from the creditors. Rights, privileges and the liabilities accompanying these instruments are different from one another.  The main differences are as follows:
  • Ownership: Shareholders are the owners of the company. On the other hand, Debenture-holders are the creditors of the company. They are not the owners.
  • Nature of Capital: Share is the part of total capital of the company. And Debenture is an instrument of credit.
  • Profit and loss Sharing: Shareholders will get dividend if the company earns profit and bear also loss. And Debenture-holders get a fixed rate of interest. They have no connection with the profit or loss of the business.
  • Participation in Administration and Management: Shareholders can take part in directing the business. And Debenture-holders cannot take part in company directing, administration and management.
  • Refund of Capital: At the time of winding up, shareholders get refund of their money after payment of all the liabilities to the creditors, and after repaying liability, I any surplus remains. And Debenture-holders compulsorily get their money back. At the time of winding up of company their liability have to be paid first.
  • Voting Rights: Shareholders of company have their own voting rights. And Debenture-holders have no voting rights.
  • Imposing Income Tax: Tax is imposed by the government on the dividend received. And Advance tax is not imposed on the interest of debenture.
  • Security of Capital: No security is required to sell shares. And For debenture sale the company must have securities against loans and credit.
  • Time Period of Sale of Shares: Share can be sold at any time of formation of the company and for any further need. And After the formation only public limited company may sell debenture if necessity is high.
  • Restriction on Sale of Shares: There are some restrictions in the Company Act to sell shares at premium or at per (discount). And there is no restriction for sale of debenture.
  • Rights and Liability of Shareholders: The liability and right of the Shareholders are mentioned in the Memorandum of Association and Articles of Association. And the rights and advantages of debenture-holders are mentioned in the debenture.
  • Status of Shareholders: The shareholders get the status of decision makers and directors. And Debenture-holders are treated as creditors.
  • Repayment of Share Capital: The share capital is not refunded during the company’s life except of preference shares. And all money must be refunded during the company’s life for all debentures except irredeemable debentures.

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