What advantages does issue of debentures provide over the issue of equity shares ?

Or

Differentiate between Shares and Debentures.

1. It is preferred by investors who want fixed income at lesser risk;

2. Debentures are fixed charge funds and do not participate in profits of the company.

3. The issue of debentures is suitable in the situation when the sales and earning are relatively stable;

4. As debentures do not carry voting rights, financing through debentures does not dilute control of equity shareholders on management.

5. Financing through debentures is less costly as compared to cost of preference or equity capital as the interest payment on debentures is tax deductibel.

Differences between debentures and shares :

1. Shares are parts of the capital of the company. Debentures constitute loan to the company. Shareholders are owners of the company. Debenture holders are creditors of the company. A shareholder enjoys all the rights of membership of a company such as right to vote, etc. these rights are not available to the debenture holders.

2. Payment of fixed interest on debentures shall be made prior to payment of any dividend to the shareholders out of the profits of the company.

3. Even with regard to return of principal, debentures will have prior claim over share capital.

4. Debentures usually have a charge on the assets of the company as distinguished from shares which have no such charge.

5. Interest on debentures is payable whether there are profit or not, but dividends on share are paid only where the company had earned profits. Interests on debentures is a debt and may be paid even out of capital. But a dividend on a share can never be paid out of capital.

6. Debentures carry a fixed rate of interest while dividends given to the shareholders may fluctuate from year to year according to the amount of profit.

7. Debentures do not carry voting rights, and therefore, debenture holders are not in position to exercise any control over the affairs of the company. Shareholders as members of the company, enjoy right to yote in general meetings and thus, can exercise control over the management of the company.

8. Unlike shares, debentures can be purchased and redeemed by the company unless they are perpetual or irredeemable. Debentures can not be issued at discount but a share can be issued at a discount, unless the company satisfies the conditions of section 79 of the Companies Act.