Couse Code-LLB-323 Course Teacher: Ashiya Akter

Course Title: Company and Artha Rin Adalat Ain Date : 19.05.2025

Lecture -12
There are different modes of raising finance for the smooth functioning of the company, and like
share debenture is also another mode of raising capital.
Definition of debenture:
Debenture is one of the methods of raising capital. It is a certificate of loan issued by a company.
It is actually a type of the security.
According to Palmer, “the word debenture signifies any instrument under seal, evidencing a
deed, the essence of it being the admission of indebted-ness.”
According to Thopman, “debenture is a document given by a company as evidence of a debt to
the holder usually arising out of the loan and most commonly secured by charge.”
Characteristics of debenture:
1. Each debenture numbered;
2. It is issued under the common seal of the company;
3. It is an acknowledgement of indebtedness by the company to its holder for the amount
stated in it.
4. Generally, it is a series of like debentures but any single debenture may be issued to one
person.
5. It declares payment of interest at a fixed rate until the original amount is paid back.
Classification of debenture:
1. Secured debenture:
When a company issues debenture which are secured by some charge on the property of
the company, they are called secured debenture.
2. Unsecured debenture:
When the debentures are issued without creating any charge on the assets of the
company, they are called unsecured debentures.
3. Redeemable debenture:
When debentures are issued on the conditions that the principle debt is to be repaid on a
specified debt or demand, they are called redeemable debenture. Here the main feature is
that the company is bound to repay the debt at a fixed date or demand.
4. Irredeemable debenture:
When a company issues debenture without fixing any date to repay the principle amount
to the holder, it is called irredeemable debenture.

Key Differences Between Shareholders and Debenture Holders

At the outset, the only difference between shareholders and debenture holders may seem to be
the instruments they hold. However, a deep dive reveals various other differences between the
two categories of stakeholders. Let us check out how they compare against one another in several
aspects.
Couse Code-LLB-323 Course Teacher: Ashiya Akter
Course Title: Company and Artha Rin Adalat Ain Date : 19.05.2025

Lecture -12
 Owners vs Creditors

Shareholders are essentially owners of the issuing company. When you buy shares, you acquire a
stake in the company’s ownership and become entitled to a share of its profits. These profits are
typically distributed in the form of dividends.

Debenture holders, on the other hand, are creditors rather than owners. When you purchase a
company’s debentures, you lend money to the entity. In return, you earn interest on the amount
offered as credit.

Unlike shareholders, debenture holders do not have ownership rights. This distinction means that
while shareholders benefit from a company’s growth, debenture holders benefit from a
company’s creditworthiness.

 Returns Earned

Shareholders primarily earn returns in the form of dividends and capital appreciation. Dividends
are not guaranteed; they depend on the company’s profitability and dividend policy.
Additionally, if a company’s share price rises, shareholders can benefit from capital gains.

In contrast, debenture holders earn a fixed interest on the value of the debentures they hold. This
interest is determined beforehand and paid at regular intervals at the rate specified by the
company.

Unlike dividend payouts, a company is obligated to make interest payments on debentures —

regardless of its profitability or lack thereof. So, while shareholders may earn higher returns
during profitable phases, debenture holders enjoy stabler and more predictable returns.

 Voting Rights

One of the key privileges of being a shareholder is the right to vote on major decisions related to
the company. These decisions may include approving significant mergers, electing the board of
directors and even issuing new tranches of securities.

With these voting rights, shareholders get to have a say in how the company is run. They can
also influence the company’s strategic decisions, which, in turn, impacts the entity’s
profitability.

Debenture holders, on the other hand, do not have any voting rights. Since they are creditors and
not owners, they do not participate in the company’s management decisions. Their primary
concern is the timely repayment of the interest and principal due on the debentures.

 Conversion Rights
Couse Code-LLB-323 Course Teacher: Ashiya Akter
Course Title: Company and Artha Rin Adalat Ain Date : 19.05.2025

Lecture -12
Shareholders and debenture holders also have different conversion rights. More specifically,
shareholders typically do not have any conversion rights associated with their equity holdings.
They directly hold ownership stakes in the company.

Debenture holders, however, may be offered convertible debentures that can be converted into
equity shares of the company at a later date under conditional terms. This feature gives debenture
holders the potential to become shareholders and participate in the company’s growth.

Conversion rights in debentures can be particularly beneficial in a rising market because they
allow debenture holders to benefit from the company’s success by converting debt into growing
equity.

 Priority During Liquidation

In the unfortunate event of a company’s liquidation, shareholders and debenture holders are in
different positions on the priority list. When it comes to the repayment of their invested capital,
debenture holders have the upper hand here and are given priority over shareholders.

Since they are creditors, those holding debentures are repaid before any residual assets are
distributed to shareholders. This makes debentures less risky when compared with equity
instruments because debt instrument holders are more likely to recover their investments.

Shareholders, on the other hand, are last in line during liquidation. They receive whatever
remains after all debts, including debentures, have been paid off. If the company is nearly
bankrupt, shareholders run the risk of not recovering their investments partially or fully.

Shareholders vs Debenture Holders: A Comparison

Having seen how shareholders and debenture holders differ in various aspects, let us tabulate
these differences, so you can obtain more clarity on the subject.

Particulars Shareholders Debenture Holders

Shareholders are partial owners of Debenture holders are creditors of the
Ownership
the company company
Hold debentures, which are debt
Instruments held Hold equity shares of the company
instruments issued by the company
Earn dividends and capital
Earn fixed interest at predetermined
appreciation; returns are variable
Returns intervals; returns are stable and
and depend on company
predictable
performance
Typically have voting rights and No voting rights; do not influence
Voting rights
can influence corporate decisions company management
Risk Higher risk because the returns Lower risk because the interest
depend on the company’s payments are obligatory, and principal
Couse Code-LLB-323 Course Teacher: Ashiya Akter
Course Title: Company and Artha Rin Adalat Ain Date : 19.05.2025

Lecture -12
profitability and stock market
repayment is prioritised
conditions
Priority during Last to be paid; receive residual Priority over shareholders; repaid
liquidation assets after all debts are cleared before any distribution to shareholders
Convertible debentures can be
No conversion rights associated
Conversion rights converted into equity shares under
with equity shares
specific terms
Have a residual claim on the Have a fixed claim on the company’s
Claim on assets
company’s assets assets as creditors
Debentures are typically issued for a
Shares represent a permanent
Significance fixed term, after which they are
ownership interest in the company
redeemed
The company is not obligated to The company is obligated to pay
Company’s
pay dividends to shareholders as it interest to debenture holders as per the
obligation
is a discretionary benefit agreed schedule
No protection of capital;
Capital is generally protected unless
Capital protection shareholders may lose their entire
the company defaults
investment
Shareholders may face dilution if Debenture holders do not face
Dilution of
the company issues additional ownership dilution as they do not own
ownership
shares equity
Role in company’s
Shareholders can influence the Debenture holders have no control over
growth and
company's decisions through voting the company’s operations
decisions
Shareholders’ investments are
Debenture prices are less volatile and
highly sensitive to market
Market sensitivity are primarily influenced by interest
conditions and company
rates and the company’s credit rating
performance