Differences Between Preference Shares and Debentures

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Differences Between Preference Shares and Debentures

By | March 2011
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Differences between preference shares and debentures
* Preference Shareholders are effectively owners; debenture-holders are creditors. * Preference Shareholders may vote at AGMs and be elected as directors; debenture-holders may not vote at AGMs or be elected as directors. * Preference Shareholders receive profit in the form of dividends; debenture-holders receive a fixed rate of interest. * If there is no profit, the shareholder does not receive a dividend; interest is paid to debenture-holders regardless of whether or not a profit has been made. * In case of dissolution of firms debenture holders are paid first as compared to shareholder.

The word ‘Debenture’ is derived from the Latin term debere which means “to borrow”. Share capital is the main source of finance of a joint stock company. Such capital is raised by issuing shares. Those who hold the shares of the company are called the shareholders and are owners of the company. Company may need additional amount of money for a long period. It cannot issue shares every time. It can raise loan from the public. The amount of loan can be divided into units of small denominations and the company can sell them to the public. Each unit is called a ‘debenture’ and holder of such units is called Debenture holder. The amount so raised is loan for the company. A Debenture is a unit of loan amount. When a company intends to raise the loan amount from the public it issues debentures. A debenture is a document issued under the seal of the company. It is an acknowledgment of the loan received by the company equal to the nominal value of the debenture. It bears the date of redemption and rate and mode of payment of interest. The more presise difference is as in the below table.

* Basis of Difference| * Preference Shares| * DEBENTURES| * 1. Capital| * A share is a part of equity or preference share capital of a company. The holders...
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