Differences between equity shares and debentures

Differences between equity shares and debentures

The following are some of the differences between equity shares and debentures

1. Motive of issue

Equity Shares: Equity shares are issued to meet long term financial requirements.

Dividend: Dividend are issued to meet long term and medium term financial requirements.

2. Investor preference

Equity Shares: Generally equity shares are preferred by adventurous investors with risk bearing capacity.

Dividend: Dividend are preferred by cautious investors who are reluctant to take risks.

3. Return

Equity Shares: Returns (dividends) are not fixed. They are dependent on the profits earned. High returns in case of high profits and low return in case of low profits.

Dividend: Returns (interest) are fixed in nature.

4. Priority in return

Equity Shares: They are residual claimants. They can expect dividends only after interest has been paid on debentures and preference dividend has been paid to preference shareholders.

Dividend: Interest has to be paid to them before any dividend can be distributed.

5. Settlement of claims during liquidation

Equity Shares: Their claims will be settled only after the claims of preference shareholders and debenture can be distributed to holders have been settled.

Dividend: Their claims have to be settled before anything preference or equity shareholders.

6. Financial burden

Equity Shares: Payment of equity dividends is optional. It is dependent on the discretion of the Board of Directors. Therefore there is no fixed financial commitment.

Dividend: Payment of interest on debentures is a fixed financial commitment.

7. Redemption

Equity Shares: No redemption until liquidation.

Dividend: Redeemable as per terms of issue.

8. Voting rights

Equity Shares: Enjoy voting rights

Dividend: Do not enjoy voting rights.

9. Reduction of capital

Equity Shares: Reduction of Capital is done by reorganization.

Dividend: Reduction of Capital is done by repayment.

10. Price

Equity Shares: Generally of lower denomination.

Dividend: Generally of higher denomination

11. Type of investors.

Equity Shares: Even small investors can invest because of the lower denomination

Dividend: Preferred by medium and large investors. Small investors would find it difficult to invest because of the higher denomination

12. Borrowing capacity

Equity Shares: Strengthens borrowing capacity.

Dividend: Reduces borrowing capacity.

13. Capitalization

Equity Shares: There are chances for over-capitalization.

Dividend: Lesser chances for over-capitalization.

14. Charge on assets

Equity Shares: Does not create charge on the assets.

Dividend: Generally creates charge on the assets of the company.

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