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