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SHARES VS. DEBENTURES

 A major part to start a business or to run a business successfully is finance. The company must ensure all the time they are in good financial position and can face any unexpected risks. No doubt there are quite a few finance options available out there. One needs to choose wisely and calculatedly from among these options that which one would be better for their organization. Not all of these options will necessarily be apt for the nature of your business. Let us talk about two of such finance options. One being ‘shares’ and the other ‘debentures’. What exactly are these and which one would be more beneficial for you.

 

SHARES

Basically, these are a part of the company that can be sold or bought indicating that the shareholder is the owner of the company up to the amount of his shares. These are known as the owner’s fund. Often, if the company is in the need of funds then they tend to sell some of their shares to the prospective buyers.

There are two types of these shares – ‘equity shares’ and ‘preference shares’. Equity shares are the shares that do not benefit the owner with any kind of preferential rights or authorities whereas, preference shares come with its own benefits.

Some of these benefits are that preference shareholders have a right to receive a fixed rate of dividend from the profit before any of the equity shareholders are declared their dividend. If in case, the profits are not enough to be divided between both the holders then the equity shareholder will be left with no dividend. Also, if the company is winding up, preference shareholder’s capital is returned before the equity shareholders.

One downside is that preference shareholders do get any say in the management or do not have any voting rights in the company. This privilege is only provided to the equity stakeholders.

 

DEBENTURES

These are the borrowed funds that are used to raise long-term capital from a source outside of the company like corporations and governments. Although, there is a fixed rate of interest that needs to be paid here. The debenture issued is a cognizance that the company has borrowed funds from the source which it guarantees to return on a certain date in the future. Therefore, the debenture holders are known as ‘creditors of the company’.

For the public issue of debentures, it is mandatory that it has been rated by a credit rating agency like ‘Credit Rating and Information Services of India Ltd.’ (CRISIL).

 

SHARES VS. DEBENTURES

While the shares are considered to be owner’s funds, the debentures are categorized under the borrowed funds which means that there is a fixed rate of interest that must be paid from time to time. Also, if debentures are issued, you don’t get any rights or benefits from the company whereas, in case of shares, you have a voting right or you receive a fixed dividend.

The shares are issued exactly at their face value which means that there won’t be any discount on the issue which is possible in the case of debentures. Although in debentures, the company’s assets are to be kept with the source as mortgage which is not the case in shares.

From a company’s perspective, if equity shares are issued then it will increase the borrowing capacity of the company. On the other hand, if debentures are issued, it will decrease its borrowing capacity.

 

There isn’t a right or wrong source of fund out there. It lies in your hands which source you choose. However, it is a very crucial decision which should be made after doing the complete research and going through the pros and cons of each one of them. The decision should be wise and favorable for your company.