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Explain the difference between debentures and equity shares?
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Here's a breakdown of the key differences between debentures and equity shares:
Debentures
- Nature: Debentures represent a form of debt or loan taken by a company. The company is essentially borrowing money from debenture holders.
- Ownership: Debenture holders are creditors of the company, not owners.
- Return: Debenture holders receive a fixed rate of interest, regardless of the company's profit.
- Risk: Generally considered less risky than equity shares because of the fixed interest payments and priority in repayment during liquidation.
- Voting Rights: Debenture holders typically do not have voting rights in the company's general meetings.
- Security: Debentures can be either secured (backed by the company's assets) or unsecured (not backed by specific assets).
- Repayment: Debentures have a fixed maturity date when the principal amount is repaid.
Equity Shares
- Nature: Equity shares represent ownership in a company. Shareholders are part-owners of the business.
- Ownership: Equity shareholders are owners of the company.
- Return: Equity shareholders receive dividends, which are a portion of the company's profits. The amount of dividend can vary and is not guaranteed.
- Risk: Generally considered riskier than debentures because dividends are not guaranteed, and the value of shares can fluctuate significantly.
- Voting Rights: Equity shareholders typically have voting rights and can participate in the company's decision-making.
- Security: Equity shares are not secured. In the event of liquidation, equity shareholders are paid after all creditors, including debenture holders, are paid.
- Repayment: Equity shares do not have a fixed maturity date and are generally not repaid unless the company buys them back or is liquidated.
Summary Table
| Feature | Debentures | Equity Shares |
|---|---|---|
| Nature | Debt/Loan | Ownership |
| Holder Status | Creditor | Owner |
| Return | Fixed Interest | Dividends (variable, not guaranteed) |
| Risk | Lower | Higher |
| Voting Rights | No (typically) | Yes |
| Security | Secured or Unsecured | Unsecured |
| Repayment | Fixed Maturity Date | No Fixed Maturity |