For starting a large scale organization there is a need for huge amounts of capital. Equity shares are issued to meet long term financial requirements dividend. It has the qualities of both equity shares and debentures. Funds are raised by such debentures to purchase certain equipment for the running life of the business. Companies often issue shares to raise capital for operational and strategic reasons. There are two types of shares which a company may issue 1 preference shares 2 equality shares. The various avenues for investment, ranging from risk less to high risk investment opportunities consist of both security and non security forms of investment. Debentures meaning, issue, features, types, advantages, disadvantages the term debenture is derived from the latin word debere which means to owe a debt. Difference between share and debenture share vs debenture. Each share forms a unit of ownership of a company and is offered for sale so as to raise capital for the company. Bonds refer to a way of making a loan to a company or government agency. A limited company may raise finance either by issuing shares or by raising loans. 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. Equally, the shareholders rights for different classes of shares do not have to.
A share is a share in share of the sharecapital of the company. The terms debentures and bonds ar e now being used inter changeably. A debenture is a type of bond thats not secured by any asset. There are different types of securities conferring different sets of rights on the. Dividend are preferred by cautious investors who are reluctant. The following are the major differences between shares and debentures. There are different types of shares such as equity shares, preference shares, bonus shares, right shares, and employees stock option plan shares. Each share in a company shall have a distinctive number. Holders of these shares are called shareholders or members of the company. The following are some of the differences between equity shares and debentures. The shares imply property rights to its owner and depending the type of share, have right to vote in actionists board. While shares refers to the share capital of the company.
The share capital is non refundable except in the case of winding up and reduction of capital. Shares cannot be converted into debentures whereas debentures can be converted into shares. A debenture may, be defined as document issued by the company as an evidence of debt. Debentures can be issued at a discount, whereas shares cannot be. The evolution of the indian capital market has been through various. These debentures are redeemed after the redemption of first debentures.
Debentures are also known as a bond which serves as an iou between issuers and purchaser. Debentures pay the holders a fixed rate of interest this interest rate is usually lowe. Valuation of bondsdebentures, answers to face value. Different types of shares what is an ordinary share. The most popular type of share is called a common or ordinary share. A statutory merger is one in which all the assets and liabilities of the smaller company is acquired by the bigger acquiring company. 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. Shares and debentures are common terms when it comes to investing in a business or a firm. Nov 19, 2018 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. But before moving towards the types of debentures, lets see what is debenture. 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. 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. There are different types of securities conferring different sets of rights on the investors and different sets of conditions under which these rights can be exercised. 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.
These are mediumlong term debt or loans taken by a company to raise capital. Shares or stock refer to owning a stake in a company or a fund. A debenture is a medium to long term debt instrument for a company, which is used to raise capital from the investors. 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. Preference shares and debentures are two different types of financial instruments. Differences between shareholders and debentures holders. Companies use debentures when they need to borrow the money at a fixed rate of interest for its expansion. The debenture classification is based on their tenure, redemption, mode of redemption, convertibility, security, transferability, type of interest rate, coupon rate, etc. Generally equity shares are preferred by adventurous investors with risk bearing capacity dividend.
The income received from the ownership of shares is a dividend. Different forms of debentures are given and discussed below. In case of debentures, the rate of debentures are fixed and known to investors. The holders of such debentures can not convert their debentures into the shares of the company. All other company types, whether public limited companies, designated activity companies. The lecture describes the meaning of shares along with its types and in the same way. If a company goes bankrupt, different security holders will be paid with different priority. It describes the right of the holder to the specified amount of the share. Giulia gabassi equality principle categories increased voting shares and multiple voting shares preferred shares tracking shares saving shares dividendbearing shares shares in favour of employees redeemable shares 2437sexies c. The rate of conversion and the period after which the conversion will take effect are declared in the terms and conditions of the agreement of debentures at the time of issue.
Types of shares and debentures preferred stock financial capital. Convertibility in debentures denotes conversion of a debenture to equity shares. Bond issued by government do not have any risk of default. An actual sale transaction of shares between buyer and seller is. A legal appraisal of the concepts of shares and debentures as. There are different types of debentures, which probably used now days for raising finance. Preference sharesalso referred to as preferred sharesare an equity instrument known for. Convertible debentures usually have a lower interest rate compared to non. The holders of these types of debentures are entitled to receive interest at fixed rate only out of current year profit. The interest on debentures is a charged on the profit and loss account of the company. Shares may be further subdivided into different types, as follows. Oct 27, 20 debentures are usually secured by charges on the companys property, but do not have to be called bare or naked debentures. The upcoming discussion will update you about the difference between shares and debentures.
Definition,type and issue of debentures caclubindia. Traditionally, the government issued bonds, but these days, bonds are also being issued by semigovernment and nongovernmental organisations. It is an agreement to be agreed between the corporation and the debenture holders that decides the characteristics of a debenture. A company can issue different types of debentures for raising funds for long term purposes.
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. These securities are repayable after a fixedperiod. Convertible debenture holders have an option of converting their holdings into equity shares. Nonconvertible debentures, which are simply regular debentures, cannot be converted into equity shares of the liable company. As a result, the smaller target company loses its existence as a separate entity. Every business requires capital for starting a business.
This meant, of course, that it is susceptible to approaches from other businesses such as exchanges elsewhere in the world that may want to merge with it or take it over. Mar 26, 2018 in this video the differences between shares and debentures has been explained, using comparison chart. Mar 12, 2020 preference shares and debentures are two different types of financial instruments. Usually, they will be offered a higher return as they undertake more risk. First debentures these debentures are redeemed before other debentures. Can debentures be converted into shares and viceversa. Mar, 20 a debentures is a longterm debt instrument or security. Define shares explain the different types of shares in. We look at the features of different types of share that companies can use. If in 20, when the redemption is due, debentureholders are allowed to convert the debentures into shares, the relevant amount will be. The debentures are generally given a floating charge over the assets of the company.
The holders of the equity shares with differential rights shall enjoy all other. Regular debentures act as loans against the company, which make the owner of the debenture a creditor with preferred status in case of liquidation. Saturday, may 16, 2015 amity university rajasthan 12 12. 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. A part of these instruments are converted into equity shares in the future at notice of the issuer. The process of purchasing and selling shares often involves going through a stockbroker as a middle man. Difference between shares and debentures difference between. Secured and unsecured, registered and bearer, convertible and nonconvertible, first and second are four types of debentures. The liquidity of markets is a major consideration as to whether a share is able to be sold at any given time. It is very difficult to raise funds through ordinary debenture. Redemption value is the amount the bond holder develops on maturity. Redeemable preference shares combine the features of preference. Let us discuss about different types of investment options for small investors and entrepreneurs. Ordinary shareholders own a piece of the company and have certain rights.
Convertible debentures debentures which are convertible in to shares or securities at the option of the holders, after a certain period, are called convertible debentures. In these types of debentures, the debenture is given priority of payment after other debts, when a company goes into liquidation. Debentures, as such, do not have to be registered, but charges securing them do. An allotment of debentures can be made where certain conditions are met.
When you buy stocks, you become one of the owners of the company. The holder of shares is known as a shareholder while the holder of debentures is known as debenture holder. Such debentures are issued without mortgaging any asset, i. Different types of shares johannesburg stock exchange. Study 45 shares and debentures flashcards from george e.
When the debentures are secured, they are paid on priority in comparison to all other creditors. Explain various types of debentures issued by companies. Apr 14, 2010 debentures are different from stocks and bonds, although all three are types of investment. A company in india can issue secured or unsecured debentures. 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. The mergers can be classified as follows on the basis of forms of integration. The investment of debentures does not imply a property right, only an obligation for issuer to pay interest and whole lending in defined periods. A shareholder gets dividend, which shall be payable out of undistributed profits. Second debentures these debentures are redeemed after the redemption of first debentures. A company may increase part of its capital by obtaining loans. 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. What are the different classes of ordinary shares in a limited company.
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. Types of debentures basis redemption, convertibility. 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. Debenture stocks are an equity security, not a loan.
They are also known as a subordinated loan, subordinated bonds, subordinated debt or junior debt. Corporate bondsdebentures a convertible b non convertible 2. The shareholders of the acquired company sometimes prefer such a mode of payment because of security of income along with an option of conversion into equity within a stated period. Types of shares and debentures free download as pdf file. 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. Share capital is not returned except in case of redeemable preference shares. The flow of presentation definition about debentures types of debentures features valuation of debentures bond yields 3.
These debentures are redeemed before other debentures. Ultimately, a debenture is not like a standard product configured strictly. A company may also finance a merger through issue of fixed interest bearing convertible debentures and convertible preference shares bearing a fixed rate of dividend. The term debenture is derived from the latin word debere which means to a money owing. Debentures are a medium to a long term investment that allows companies to raise finance by borrowing money from citizens. There are two types of debentures convertible debentures nonconvertible debentures. The debenture holders of such debentures cannot convert their debentures into shares of the compan y. Suppose in 2008 10,00,000 debentures were issued at a discount of 5% with a term of 6 years.
Bond is also an instrument of acknowledgement of debt. Dividend are issued to meet long term and medium term financial requirements 2. The capital of the company can be divided into different units with definite value called shares. Preference sharesalso referred to as preferred sharesare an equity instrument known for giving owners. Shares of public companies trade on regulated stock exchanges, where investors can place. The investor has the option to either convert these debentures into shares at price decided by the issueragreed upon at the time of issue. Difference between shares and debentures with similarities. Gk, general studies, optional notes for upsc, ias, banking, civil services. Basically there are three types of shares into which the whole capital of the company is divided. In this video the differences between shares and debentures has been explained, using comparison chart.
May 05, 2015 optionally convertible debentures ocd. Shares vs debentures top differences to learn with. Intro to convertible debentures the cash payback period is the number of years it takes for the dollar premium to be recovered through the yield pickup of the debenture. Debentures are different from stocks and bonds, although all three are types of investment.
194 1346 1163 622 1194 1298 918 243 47 852 440 31 1443 764 357 479 627 255 1465 17 907 443 182 250 968 969 1414 144 1112 1343