Difference Between Shareholders and Debenture Holders

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  • 06 Oct 2023
Difference Between Shareholders and Debenture Holders

Key Highlights

  • Debentures represent debt and offer fixed interest payments, while shares represent ownership in a company.
  • Shareholders are individuals or entities who possess shares in a company. Shareholders are often called company owners since they hold ownership stakes in the company.
  • A debenture holder is an individual or entity that has invested in a company's debt instruments.
  • Debenture holders are entitled to interest since they have lent money to the company.
  • Shareholders receive dividends as a share of a company's profits.
  • There is less risk associated with debentures than with shares.

Shareholders are individuals or entities who possess shares in a company. Interestingly, it's not limited to individuals; in certain situations, other companies or partnership firms can also hold shares in a company. Since they have ownership stakes in the company, shareholders are often called the owners of the company.

A debenture holder is an individual or entity that has invested in a company's debt instruments. A company can use these debt instruments to raise funds. A company issues debentures when it needs to borrow money from the public and pays a fixed interest rate to the debenture holders on a regular basis. After the borrowing period ends, the company repays the principal amount to the debenture holders, effectively redeeming them.

A person who holds debentures is referred to as a debenture holder, while someone who holds shares is called a shareholder. Shareholders acquire shares in a company through a share market app like Kotak Securities, and shares represent a portion of the company's share capital. On the other hand, debenture holders subscribe to debentures, which are essentially a form of a loan.

The company's shareholders are its co-owners and own a stake in it. Conversely, debenture holders are creditors who lend money to the company. Shareholders are typically invited to participate in the company's annual general meetings, whereas debenture holders are usually not invited unless decisions directly impact their interests are being discussed.

A Board of Directors, elected by the shareholders, oversees the company's management and governance. Debenture holders are not involved in the company's management and regulation.

Shareholders receive copies of the Annual Report, which includes financial statements like the Balance Sheet, Profit & Loss Account, and Auditor's Report.

Interest on debentures is paid regularly, regardless of the company's profitability. However, dividend payments to shareholders depend on the company earning profits. Debenture interest can sometimes be paid from the company's capital, but dividend payments cannot be funded this way.

The rate of dividend on equity shares is not guaranteed, whereas the rate of interest on debentures is fixed. Debentures cannot be converted into shares, but shares can be converted into debentures.

Convertible debentures, which allow conversion into shares at the debenture holder's discretion, can be issued. However, shares that can be converted into debentures cannot be issued.

Debentures are usually secured and are backed by the company's assets, while shares have no such asset backing. In the event of a company's liquidation, secured debenture holders are paid before shareholders.

You can see by now that shareholders and debenture holders are fundamentally different. They differ far more than simply being the holders of their respective instruments. Take a look at the key difference between shareholders and debenture holders.

Shareholders Debenture holders
Shareholders are a company's owners.A debenture holder is simply a lender to the company and is considered a creditor.
The company's shareholders actively participate in its decision-making process.Debenture holders are not allowed to participate in decision-making.
Dividends are basically a share of a company's profits that the shareholders receive.Debenture holders are entitled to interest since they have lent money to the company.
A company may choose not to pay dividends to its shareholders despite generating profits.A company has to pay interest to its debenture holders whether it generates profits or not

Conclusion

Shareholders and debenture holders play distinct roles in a company's financial structure. However, there is a significant difference between shareholders and debenture holders. Shareholders are considered the owners of a company because they hold equity shares, which represent ownership stakes in the business. They actively participate in decision-making processes and are entitled to dividends. However, dividend payments are not guaranteed and depend on the company's profitability.

On the other hand, debenture holders are essentially lenders to the company and are regarded as creditors. They invest in the company's debt instruments and receive fixed interest payments, irrespective of whether the company generates profits or not.

FAQs on Shareholder and Debenture Holder

A debenture is an unsecured debt instrument issued by a company or the government to acquire funds from the public, such as a bond.

Debentures represent debt and offer fixed interest payments, while shares represent ownership in a company.

Investors prefer a debenture because it is secured and repaid before shareholders are paid.

Even if the company doesn't make a profit, the debenture holders receive interest payments. Stocks are risky investments due to market volatility. However, there is less risk associated with debentures than with shares. Additionally, if a company issues secured debentures, the holders are guaranteed payment.

A debt instrument is issued to investors in order to raise funds. As a guarantee of repayment, they are given debenture receipts bearing a fixed interest rate. As a result, holders of debentures receive interest.

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