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What is the difference between equity share and a debenture?

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posted Jul 18 by Sagar Sharma

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Some of the major differences between equity shares and debentures are as follows:

(a) Status:

A debenture-holder is a creditor of the company, but a shareholder is a part-owner of the company. Thus, a debenture is a ‘creditor ship security’ as against a share which is an ‘ownership security’.

(b) Return on investment:

A debenture-holder gets the interest payment regardless of the amount of profit or loss at the stipulated time but the shareholder does not receive any dividend unless the company makes a profit. Even when the company has made a profit, the payment of dividend normally depends upon the discretion of the directors.

(c) Terms of repayment:

A debenture-holder is entitled to repayment of principal amount at the expiry of a definite period, but, expects in case of redeemable preference shares, the share capital cannot be repaid without legal formalities.

(d) Order of repayment:

In case of winding up, the amount of debenture- holders must be repaid before any amount is paid to preference or equity shareholders.

(e) Conditions of issue:

There are no restrictions regarding the terms of issue of debentures but shares can be issued at a discount only subject to certain conditions contained in the companies Act.

(f) Income:

Dividend is the income of the shareholders. Dividend is always payable out of profits. Interest is the income of debenture-holders. It is payable whether the company makes a profit or not. In case of insufficient profit, the interest is payable out of capital.

(g) Security:

Shareholders have no charge over the assets of the company. But
generally, debenture holders are having a charge either on all assets or specific assets of the company.

(h) Voice in the Management:

Shareholders are having a right to vote and right to attend meetings. They have a voice in the management. But as Sec. 117 of the Act, debenture-holders have no right to vote and attend general meeting.

answer Jul 19 by Durga Prasad
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