What is Capital?

• Finance is the backbone of all the business activities. No business activity can ever be pursued without financial support. All functions of business are ultimately dependent on finance.
• The finance required by business is known as ‘capital’.
• Capital formation is a process of collection of capital from different sources as per the fiscal plan of a company.
• The capital collected will be a mix of owned capital and borrowed capital.
• The capital raised by the company with the help of owners or shareholders is known as owned capital or ownership capital. The shareholders purchase shares of the company and provide necessary capital required.
• Borrowed capital is referred to as the capital which is borrowed from creditors. It is also called as debt capital.
• It is raised by the way of issue of debentures, fixed deposits, credit from financial institutions.

Shares and debentures are an important part of every organisation, these instruments are generally used to raise funds. The investment decision between these securities depend on many factors like risk profile, returns expected and investment horizon. Good investment structure will have a balance of both  in order to minimise the risks and maximize the expected returns. 

What are Shares?

Section 2(84) of the Companies Act 2013, defines “ Share means a share in the share capital of a company and includes stock”.

• It is the division of capital into smaller yet equal units. It facilitates the investors to subscribe to the capital in smaller amount.
• These units then are further referred to as ‘shares’. It is the smallest unit in the total share capital of a company. The people who invest and hold such securities are known as shareholders.
• Shares are also known as ownership securities. Shares represent the ownership capital of the company.

Features:

• Share is the smallest value in the total share capital of company.
• In case of physical shares, each share possesses a distinctive number for identification as mentioned in the share certificate.
• Share represents a movable property.
• Entitled to get a share in the net profits of the company by the way of dividend.
• The shares are entitled to certain rights such as right to receive dividend, right to attend shareholders’ meetings, right to inspect statutory books and right to vote.
• Share certificate is a document issued by the company, under the common seal as an evidence of ownership.
• A company can issue two type of shares: Equity equity shares do not enjoy preference for dividend and do not have priority for repayment of capital at the time of winding up.They are also known as ordinary shares, shares that are not preference shares are called equity shares. Preference shares are those shares which carry preferential right as to payment of dividend and repayment of capital.

What are Debentures?

Sec 2(30) of the Companies Act 2013, only states that, ‘the word debenture includes debenture stock, bonds and other instruments of the company evidencing a debt, whether constituting a charge on the assets of the company or not’.

Topham defines: “A debenture is a document given by a company as evidence of debt to the holder, usually arising out of loan and most commonly secured by charge”.

Palmer defines: “A debenture is an instrument under seal evidencing debt, the essence of it being admission of indebtedness”.

• Debentures are also known as creditorship securities.They are one of the primary sources of raising borrowed capital. Debentures have acquired a significant position in the financial structure of the organisations.
• Debentures is a form of corporate loan, divided into many units called “Debentures”.
• Debentures are issued to a huge number of investors. the person who purchases a debenture is known as a debenture holder.
• The organisation issues a debenture certificate under its seal as an evidence of or acknowledgement of loan.
• The term debenture has come from the latin word ‘debere’ which means to ‘owe’.
• Under the existing definition, debenture includes debenture stock, debenture means a document which either creates or acknowledges debt. Generally, debenture constitutes a lien on some property of company but there may be a debenture without such lien.
• It is a debt tool, finance raised through debentures is considered as a loan. Is an acknowledgement from the company that it has taken a loan from the public. Debentures are issued by analysing the creditworthiness of the company.
• A debenture is an instrument of debt executed by the company acknowledging its obligation to repay the sum at a specified rate and also carrying a fixed rate of interest.
• Debentures are the borrowed capital of the company. The people holding debentures are known as debenture holders. A trust deed is executed when debentures are issued to protect the interest of the debenture holders.

Features:

• Debenture is an evidence of debt by company that it owes specified sum of money to the holder of the debenture.
• The face value of debenture normally carries high denomination.
• The principle amount of debenture is repaired on maturity date.
• Debenture holders have a priority in repayment over the other claimants of company.
• A fixed rate of interest is paid to debenture holders, whether, the company makes profit or not.
• Debenture holder is a creditor of the company.
• Generally secured by a fixed or floating charge on assets of the company.

Difference between shares and debentures:

Let us now understand the difference between shares and debentures:

Which is a better investment choice between the two?

Making an investment decision requires a good analysis of various parameters like risk appetite, expected returns, prevailing maket conditions.

• Investment in shares is risky, the prices fluctuate as per the market conditions and demand- supply. Dividend is paid as per the profits of the company. Share holders are the residual claimants of the company.
• Investment in debentures is less risky, there is a fixed rate of interest given to the debenture holders irrespective of the profits of the company. After the maturity, debentures are redeemed and the capital is returned to the debenture holders.

Disclaimer:

Investment in securities market are subject to market risks, read all the related documents carefully before investing.

The information presented on this website is with the objective of impartial financial knowledge and for informational purposes only, not a substitute for any professional financial advise.

We have made sure to provide information with atmost accuracy. Regardless of anything, financial information imparted through this website should not be considered as an offer to make investments decisions.

You must consult a qualified financial advisor before making any actual investment.