Difference Between Shareholder and Debenture Holder

Who is Debenture Holder

Debentures are long-term debt instruments issued by companies to raise capital. Investors who buy these instruments are known as debenture holders. They are lenders to the company and are paid a fixed rate of interest at predetermined intervals (half-yearly or yearly).

Upon completion of the term of the debenture, or earlier if the company has so specified, the company pays back the principal amount to the debenture holder, and thus the debenture is redeemed. Interest is also paid till the date of redemption.

Now that we are aware of the roles of shareholders and debenture holders, let us analyse the differences between the two. 

Key Differences Between Debenture Holder and Shareholder

Let us explore 5 pivotal differences between debenture holders and shareholders, with a focus on their roles, voting rights, and influence on a company’s financial structure. 

• Ownership and Creditorship

Shareholders are referred to as the owners of a company. Since shares represent a part of the company’s ownership, these grant them the right to the assets and earnings of the company.

Debenture holders, on the other hand, are referred to as the creditors of a company. They only possess the right to claim repayment of the loan they have extended to the company, including interest. 

• Voting Rights

Shareholders have the right to vote on significant company decisions, such as making important policies, electing a board of directors, and more.

On the other hand, debenture holders cannot participate in the company’s management, nor do they possess any voting rights. 

• Returns

Shareholders receive returns in the form of dividends. The amount they receive depends on the performance of the company and the profits earned by the company.

Debenture holders receive returns in the form of interest, regardless of the profits earned by the company. The rates of interest are usually fixed. 

• Deed of Trust

A deed of trust is executed by the company before offering the debentures for public subscription. There is no need for such a deed of trust while offering shares for subscription.

• Conversion

Shares are not convertible to debentures. However, some debentures come with the option of being convertible into shares at a specified rate and time. Post conversion, the debenture holders become shareholders and get the right to cast votes.

Shareholders vs Debenture Holders: The following table highlights the key differences between the two: 

The Bottom Line

In the case of the liquidation of a company, shareholders bear a higher risk of loss and are generally the last to be paid by the liquidator. However, debenture holders have a claim on the company’s assets and are paid before the shareholders in such a situation.

Understanding and recognising these differences between shareholders and debenture holders is crucial for making informed investment decisions and effectively managing risks.