Difference Between Shareholder and Debenture Holder

While learning about investments, you will come across two terms: shares and debentures. Companies usually raise capital by either issuing shares or debt instruments (debentures). While both these methods are used to raise funds, they create distinct relationships with investors. Thus, it is important that you know the difference between a shareholder and debenture holder, and how they each have different roles in the business’s financial structure.

In simple terms, a shareholder owns a part of the company (shares held), while a debenture holder primarily lends capital to the business. Thus, while the former is associated with the organisation either until it ceases to exist or they sell their shares, the latter’s relationship only exists until the company redeems the debenture. That is, the business pays back the principal amount along with interest to the lender.

Let us now understand who shareholders and debenture holders are in greater detail and how they differ from each other.

Who are Shareholders?

When you purchase shares in any business, you become part owner of the company (shareholder). Shareholders can be individuals or entities, and buying shares in a company entitles them to certain rights.

Let us understand who are shareholders through an example. Let us assume you have purchased 100 shares in company ‘ABC’. Now, you become a shareholder and own a certain percentage of the company. This means you have an interest in the company’s performance, as you can benefit from the company’s growth through increased share value and dividends.

As the company’s shareholder, you have certain rights:

• You can vote on important decisions concerning the company
• You have a say when electing board members
• You receive dividends when the company turns a profit
• If the business is liquidated, you are entitled to a portion of its assets

Depending on how many shares you own, you can have a significant say in the company’s affairs. However, large companies usually have millions of shareholders, and only those holding majority shares can actually get involved in the company’s operations.

Who are Debenture Holders?

As previously stated, a company can raise funds by issuing debt instruments. Anyone buying these instruments is essentially lending funds to the business, and these investors are called debenture holders. Thus, they are creditors of the company but do not own any part of the organisation.

Let us understand who debenture holders are with an example. Let us assume company ‘XYZ’ wants to raise capital to expand its operations. For this reason, it has issued debentures with an interest rate of 8% and a maturity period of 5 years. Now, you, as an investor, have invested Rs. 1 lakh. You will receive an interest payment of Rs. 8,000 every year for the five-year period. Once the maturity period ends, the business ‘XYZ’ returns the principal amount (Rs. 1 lakh) to you.

Thus, there is a key difference between investment in shares and debentures. While debenture holders get predictable returns on their investment, they do not benefit from the business’s growth as shareholders do.

Differences Between Debenture Holder and Shareholder

It is important to compare shares vs. debentures to understand how they differ. Let us now look at the key differences between shareholders and debenture holders:

As you can see, a company’s shareholders may receive dividends when the business generates profit. The company may also decide not to pay dividends to its shareholders. However, debenture holders will receive interest payments irrespective of the company’s performance.

Depending on the shareholder investment, shareholders can have a significant say in the company’s affairs. On the other hand, debenture holders are not entitled to any rights and are only viewed as the company’s creditors.

Conclusion

If a company liquidates, shareholders can incur significant losses and are usually the last ones to receive the payment from the liquidator. On the other hand, debenture holders have a claim on the business’s assets and receive payment before the company’s shareholders. By understanding the key differences between shareholders and debenture holders, you can make sound investment decisions and manage risks effectively.