Shares are uniform parts of the share capital. Debentures are uniform part of the loan capital of a company. Rights, privileges and the liabilities accompanying these instruments are different from one another. The main differences are as follows:
1. Share holders are owners of the company whereas the debenture holders are creditors of the company. Therefore, while the shareholders have a multi-faceted interest in the welfare of the company. The debenture holders have a very limited interest in the company. i.e. limited to receiving interest on time.
2. A shareholder is entitled to receive dividend when there are profits. The rate of dividend varies from year to year depending upon the amount of profit. On the other hand, the debenture holders are entitled to interest at a fixed rate which the company must pay whether or not there are profits.
3. A shareholder enjoys the rights of proprietorship of a company whereas a debenture holder can enjoy the rights of a lender only.
4. A shareholder has a right of control over the working of the company by attending and voting in the general meeting. They are able to decisively influence the composition of Board of directors and other senior management positions. The debenture holders do not have any voting right, and they are unable to exercise any such influence.
5. A debenture holder gets a fixed rate of interest per annum payable on fixed dates whereas a shareholder gets a dividend far higher if the company earns good profits.
6. Dividend on shares is not a charge against profit. Interest on debentures, on the other hand, is a charge against profits and is deducted from profits for the purpose of calculating tax liability.
7. In respect of shares, dividend is payable only when the proposal to pay dividend is passed by the shareholders at the annual general meeting of the company. There is no need of such approval in the case of payment of interest on debentures.
8. A company can purchase its own shares from the market under certain condition whereas it can purchase its own debentures and cancel them or re issue them.
9. A shareholder has a claim on the accumulated profits of the company and is normally rewarded with bonus shares whereas a debenture holder has no such claims whatsoever after he has been paid the interest amount.
10. In the event of winding up, shareholders cannot claim payment unless all outside creditors have been paid in full. Debenture holders being secured creditors get priority in payment over the shareholders.