Each share forms a unit of ownership of a company and is offered for sale so as to raise capital for the company. The company is legally bound to repay the principal amount to the debenture holders on. The key difference between a share and a debenture is that while share represents part of ownership of a company, debenture acknowledges loan or debt to the company. Fixed value of a share, printed on the share certificate, is called nominal valuepar valueface value. The flow of presentation definition about debentures types of debentures features valuation of debentures bond yields 3. When u buy a bond or debenture u become a creditor to the company. Understand the meaning and basic purpose for raising debentures by the company differentiate between shares and debentures of a company understand various types of debentures pass entries for issue of debentures payable in installments. Debenture stocks are an equity security, not a loan. Every business requires capital for starting a business. A share is a share in share of the sharecapital of the company. Debentures pay the holders a fixed rate of interest this interest rate is usually lowe. Let us look at the various types of shares a company can issue equity shares and preferential shares. Distinguish between equity share finance and debenture finance. It describes the right of the holder to the specified amount of the share.
The debenture holders of such debentures cannot convert their debentures into shares of the compan y. Traditionally, the government issued bonds, but these days, bonds are also being issued by semigovernment and nongovernmental organisations. The shares imply property rights to its owner and depending the type of share, have right to vote in actionists board. Preference sharesalso referred to as preferred sharesare an equity instrument known for. Nonconvertible debentures, which are simply regular debentures, cannot be converted into equity shares of the liable company. The income received from the ownership of shares is a dividend. Section 108 provides proper instrument of transfer to be executed for effecting transfer of shares or debentures.
Debentures are also known as a bond which serves as an iou between issuers and purchaser. Definition,type and issue of debentures caclubindia. Whether debentures were issued at discount or at premium becomes irrelevant if conversion into shares takes place at the time of redemption of debenture is due. Shares may be further subdivided into different types, as follows. May 05, 2015 optionally convertible debentures ocd. You may define shares as a smaller part of capital that is known as share and a person, who owes shares is known as the shareholder. A corporation can raise capital through debentures when it needs the money and pay it back when it has a fund surplus. These securities are repayable after a fixedperiod. Companies use debentures when they need to borrow the money at a fixed rate of interest for its expansion. Debt securities include bonds and debentures, which are generally fixedincome securities. The findings of the survey have been presented in this chapter. It has the qualities of both equity shares and debentures. The preference shares are market instrument issued by the companies to raise the capital.
These debentures are redeemed after the redemption of first debentures. An actual sale transaction of shares between buyer and seller is. As in case of debentures, fixed rate of dividends is paid to the preference shareholder, despite the profits earned by the company it is liable to pay interest to the preference shareholders. Non convertible debentures does not convert into equity shares thus can yield a higher interest rate. A variety of investment avenues has been covered including shares.
Nov 19, 2018 difference between shares and debentures last updated on november 19, 2018 by surbhi s nowadays, investment in shares and debentures has taken a dominant position in the society, as people of different ages, religion, sex, and race invest their hard earned money, with an aim of getting better returns. Market value is the price in the stock exchange at which the bond is traded. A shareholder must find a buyer if he wants to dispose of his stake. Shares or stock refer to owning a stake in a company or a fund. Equity shares and debentures are the two most common types of securities issued by a company for raising longterm funds.
Read this article to learn about the debentures of a company. Valuation of bondsdebentures, answers to face value. The company will pay u dividend on the shares held by you share of your profit in the company is called dividend. Debentures meaning, issue, features, types, advantages, disadvantages the term debenture is derived from the latin word debere which means to owe a debt. If a company goes bankrupt, different security holders will be paid with different priority. A share in the share capital of the company, including stock, is the definition of the term share. Chapter 5 findings, suggestions and conclusions the survey of management of portfolio by investors was conducted in mumbai. Private equity training course business valuation course mergers and. Let us discuss about different types of investment options for small investors and entrepreneurs. The classification of the debentures can be done as redeemable, irredeemable, perpetual, convertible, nonconvertible, fully and partly secured, naked, first or second mortgage, fixed or floating rate, callable, putt able and zero coupon debentures. The holders of these types of debentures are entitled to receive interest at fixed rate only out of current year profit. Different types of shares johannesburg stock exchange. In fpo or ipo, they generally sell their shares and debentures to the investors. A debenture is a type of bond thats not secured by any asset.
What are the different classes of ordinary shares in a limited company. Ultimately, a debenture is not like a standard product configured strictly. There are numerous contrasts between inclination offers and debentures, with the greatest distinction being that an inclination share is a value security that gives the proprietor particular rights in case of a profit installment or liquidation by the hidden organization, while a debenture is an obligation security issued by an enterprise or government substance, and it is not upheld by an. Can debentures be converted into shares and viceversa. A debenture may, be defined as document issued by the company as an evidence of debt. There are different types of shares such as equity shares, preference shares, bonus shares, right shares, and employees stock option plan shares. Debentures are one of the frequently used methods by which a business can procure longterm funds for its initial financial needs or. Equity shares are issued to meet long term financial requirements dividend.
First debentures these debentures are redeemed before other debentures. Section 4 of the companies act has a definition of. On the expiry of that specified time the company has the right to pay back the debenture holders and have its properties released from the mortgage or charge. Difference between shares and debentures difference between. Following are the various types of debentures visavis their basis of classification. It is worth a study on how different type of companies and industries function to. Nowadays, investment in shares and debentures has taken a dominant position in the society, as people of different ages, religion, sex, and race invest their hard earned money, with an aim of getting better returns. Debentures are a medium to a long term investment that allows companies to raise finance by borrowing money from citizens. Ordinary shareholders own a piece of the company and have certain rights. Interest on debentures is payable at a fixed rate on specified date irrespective of profits of the company. There are different types of shares, and you must be well familiar with all of them. The upcoming discussion will update you about the difference between shares and debentures.
Differences between shareholders and debentures holders. The terms debentures and bonds ar e now being used inter changeably. Preference sharesalso referred to as preferred sharesare an equity instrument known for giving owners. The following are some of the differences between equity shares and debentures. The interest that is paid to debenture holders is calculated as a charge against profit in the companys financial statements. When the debentures are secured, they are paid on priority in comparison to all other creditors. The register is open to inspection by debenture holders and shareholders.
Debentures meaning, issue, features, types, advantages. Many corporate are entertaining form7b to effect transfer for debentures. Secured and unsecured, registered and bearer, convertible and nonconvertible, first and second are four types of debentures. Bond is also an instrument of acknowledgement of debt. Types of debentures basis redemption, convertibility. Debentures 2 learning objectives after studying this unit, you will be able to. A shareholder gets dividend, which shall be payable out of undistributed profits. In this shares vs debentures article, we will look at their meaning, head to head. It is an agreement to be agreed between the corporation and the debenture holders that decides the characteristics of a debenture. Debentures a debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although. When u buy a share, u become a shareholder of the company.
Regular debentures act as loans against the company, which make the owner of the debenture a creditor with preferred status in case of liquidation. This article throws light upon the top thirteen types of debenture. Difference between shares and debentures with similarities. Valuation of bondsdebentures, answers to face value, types. A limited company may raise finance either by issuing shares or by raising loans. Fixed rate of dividends are paid to the preference share holder as in case. Final accounts of companies including managerial remuneration, disposal of profits and issue of bonus shares. Redemption value is the amount the bond holder develops on maturity. When a company issues new shares, it shares the ownership with new shareholders forever. Dividend are preferred by cautious investors who are reluctant. For raising a capital company uses various sources of funds like share capital by issuing shares to public, debt capital by issuing debentures, term loans from banks, etc. Apr 18, 2011 section 108 provides proper instrument of transfer to be executed for effecting transfer of shares or debentures. The interest on debentures is a charged on the profit and loss account of the company.
For starting a large scale organization there is a need for huge amounts of capital. There is no provision to effect the transfer of debentures. Debentures help to reduce the burden of income tax, since interest is charged against profit and loss account. The different classes of share capital and the rights attached to. Convertible bonds can be converted into tradeavke shares subject to the conditions laid down by the promoter of such bonds. Nonconvertible bonds have to be cashed after the expiry of the tenure. Study 45 shares and debentures flashcards from george e.
Different types of shares what is an ordinary share. A bond may be delivered at par, at a premium bond holder acquires more than the par value of the bond or at a discount bond holder acquires less than the par value of the bond. Difference between share and debenture share vs debenture. Apr 14, 2010 debentures are different from stocks and bonds, although all three are types of investment. Shares and debentures are common terms when it comes to investing in a business or a firm. The capital of a company is divided into several small units and each unit is called a share, a share in a company is one of the units into which the total capital of the company is divided. However form 7b contains only to transfer shares only not debentures.
The most popular type of share is called a common or ordinary share. Debentures are of two types convertible and nonconvertible. The investor has the option to either convert these debentures into shares at price decided by the issueragreed upon at the time of issue. Debentures can be issued at a discount, whereas shares cannot be. The debenture classification is based on their tenure, redemption, mode of redemption, convertibility, security, transferability, type of interest rate, coupon rate, etc. Debentuer is a borrowed capital,but preference is owned capital. A company may issue debentures with an option to convert debentures into shares, either wholly or partly at the time of redemption, provided that the issue of debentures with an option to convert such debentures into shares shall be approved by a special resolution passed by the shareholders at a duly convened general meeting of the company. This convertibility provides attraction to the investor but yield lower interest rates. This is in accordance with section 284 of the companies act, 20. Difference between shares and debentures company accounting. A variety of investment avenues has been covered including shares, debentures, bonds, government securities, insurance policies, mutual funds, various types of fixed deposits, post office saving schemes, goldsilver and real estate for the purpose.
These debentures are redeemed before other debentures. These both are two different types of investment that a person can make or a company can issue in order to raise capital. The investment of debentures does not imply a property right, only an obligation for issuer to pay interest and whole lending in defined periods. While shares refers to the share capital of the company. Share, debentures or other interest of any member in a company. Mar 12, 2020 preference shares and debentures are two different types of financial instruments. Generally equity shares are preferred by adventurous investors with risk bearing capacity dividend. Define shares explain the different types of shares in. Related topics meaning and concept of debentures characteristics of debentures difference between shares and debentures types of debentures. Here is a compilation of top six accounting problems on debentures with its relevant solutions. The convertible debentures are the ones that can be converted into equity shares at a later time. Share capital is not returned except in case of redeemable preference shares. Funds are raised by such debentures to purchase certain equipment for the running life of the business. Shares are valued according to the various principles in different markets, but a basic premise is that a share is worth the price at which a transaction would be likely to occur were the shares to be sold.
Total shares capital of a company is divided into a number of small invisible units of a fixed amount called a share. The companies share capital and debentures rules, 2014 hereinafter referred. When you buy stocks, you become one of the owners of the company. What is the difference between share, debenture and bond. Debentures provide the way, to use leverage in the capital structure of the company. Jul 25, 2018 regular debentures act as loans against the company, which make the owner of the debenture a creditor with preferred status in case of liquidation.
The debentures are generally given a floating charge over the assets of the company. Suppose in 2008 10,00,000 debentures were issued at a discount of 5% with a term of 6 years. These are mediumlong term debt or loans taken by a company to raise capital. The process of purchasing and selling shares often involves going through a stockbroker as a middle man. Debentures are issued for a fixed sum or multiples thereof. These debentures are issued for a specified period of time. Gk, general studies, optional notes for upsc, ias, banking, civil services.
The holders of such debentures can not convert their debentures into the shares of the company. A debenture is a medium to long term debt instrument for a company, which is. Preference shares have the characteristics of both equity shares and debentures. Preference shares and debentures are two different types of financial instruments. Debenture holders were given an option to get their debentures converted into equity shares of rs. Shares vs debentures top differences to learn with. Substituted by the companies share capital and debentures amendment rules. Redeemable debentures carry a specific date of redemption on the certificate. The different classes of share capital and the rights attached to these classes are different. Pdf this paper examines the economic case for rules of company law which. If in 20, when the redemption is due, debentureholders are allowed to convert the debentures into shares, the relevant amount will be. May 05, 2015 debentures holders do not have the voting rights. The liquidity of markets is a major consideration as to whether a share is able to be sold at any given time.
Shares can be broadly divided into two categories equity and preference sh. Convertible debentures which can be converted into shares at the option of debenture holder can be issued whereas shares convertible into debentures cannot be issued. Convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. Debentures are issued for a limited time and repaid in full.
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