Difference Between Shareholder and Debenture Holder

Tanushree Jaiswal Tanushree Jaiswal

Last Updated: 17th August 2024 - 02:43 pm

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When a company needs to raise money, it has two main options: issuing shares or debt instruments like debentures. While both methods help companies raise funds, they create very different relationships with investors. Let's explore the key differences between shareholders and debenture holders to understand their unique roles in a company's financial structure.

Who is a Shareholder?

A shareholder is someone who owns shares in a company. When you buy shares, you're essentially buying a small piece of ownership in that business. Shareholders can be individuals, other companies, or even institutions like mutual funds.

For example, if you own 100 shares of Reliance Industries, you are a shareholder of that company. You have a stake in its success and can potentially benefit from its growth through increased share value and dividends.

Shareholders have certain rights, including:

1. Voting on important company decisions

2. Electing board members

3. Receiving dividends when the company is profitable

4. Getting a portion of assets if the company is liquidated

The number of shares you own determines how much say you have in the company's affairs. For instance, if you own 1% of a company's shares, your vote would carry more weight than someone who owns 0.1%.

Interestingly, some of India's largest companies have millions of shareholders. As of 2023, Reliance Industries had over 3.4 million shareholders, showing how widely ownership can be distributed.

Who is a Debenture Holder?

A debenture holder is someone who lends money to a company by buying its debentures. Debentures are a type of debt instrument that companies use to borrow money from the public. Unlike shareholders, debenture holders are not owners but creditors of the company.

Here's how it works:

1. A company issues debentures with a fixed interest rate and maturity period

2. Investors buy these debentures, essentially lending money to the company

3. The company pays regular interest to the debenture holders

4. At the end of the maturity period, the company returns the principal amount

For example, if a company issues a 5-year debenture with an 8% interest rate, and you invest ₹100,000, you would receive ₹8,000 as interest each year for 5 years. At the end of 5 years, you would get your ₹100,000 back.
Debenture holders have a more predictable return on their investment compared to shareholders, but they don't benefit from the company's growth in the same way shareholders do.

Differences Between Debenture Holder and Shareholder

Now that we understand who shareholders and debenture holders are let's dive deeper into the key differences between them:

Criteria Shareholders Debenture Holders Example
Ownership vs. Creditorship Shareholders are part-owners of the company. They have a stake in the company's assets and profits. If the company does well, the value of their shares can increase, and they might receive dividends. Debenture holders, on the other hand, are creditors. They have lent money to the company and are entitled to get it back with interest. They don't own any part of the company. Debenture holders, on the other hand, are creditors. They have lent money to the company and are entitled to get it back with interest. They don't own any part of the company.
Risk and Return Shareholders face higher risk but also have the potential for higher returns. Share prices can skyrocket if the company performs well, and shareholders can earn substantial profits. However, shareholders can lose their entire investment if the company performs poorly. Debenture holders have lower risk and more stable returns. They receive a fixed interest rate regardless of the company's performance. Even if the company is not profitable, it must pay interest to debenture holders. For example, during the COVID-19 pandemic in 2020, many companies saw their share prices plummet, causing significant losses for shareholders. However, debenture holders continued to receive their regular interest payments.
Voting Rights Shareholders have voting rights in the company. They can vote on important matters like electing the board of directors or approving major business decisions. Debenture holders don't have voting rights. They can't participate in the company's management decisions. N/A
Income Shareholders may receive dividends, which are a share of the company's profits. However, dividends are not guaranteed and depend on the company's performance and decision to distribute profits. Debenture holders receive regular interest payments. These payments are fixed and must be paid regardless of whether the company makes a profit or not. For instance, if you own shares in HDFC Bank, you may receive dividends when the bank is profitable and decides to distribute some of its earnings. But if you hold HDFC Bank debentures, you'll receive interest payments at the predetermined rate, even if the bank has a bad year.
Maturity Shares don't have a maturity date. You can hold onto them for as long as you want or sell them in the stock market whenever you choose. Debentures have a fixed maturity date. When this date arrives, the company returns the principal amount to the debenture holders. N/A
Conversion Shares cannot be converted into debentures. Some debentures can be converted into shares (convertible debentures). N/A
Priority in Liquidation Lower priority; paid after debenture holders if the company is liquidated. Higher priority; paid before shareholders in the event of liquidation. For example, when Kingfisher Airlines went bankrupt in 2012, debenture holders and other creditors were paid first from the company's remaining assets. Shareholders received whatever was left, which in this case was nothing.
Influence on Company Decisions Shareholders, especially those with significant holdings, can influence company decisions by voting rights and electing board members. Debenture holders have no say in the company's management or decisions unless it defaults on its payments. N/A
Potential for Capital Appreciation Shareholders can benefit from capital appreciation if the value of their shares increases over time.  No potential for capital appreciation; returns limited to interest payments. For instance, if you bought Infosys shares during its IPO in 1993 at ₹95 per share, those shares would be worth over ₹1,400 each in 2024, representing a massive increase in value.
Flexibility Shareholders have more flexibility. They can sell their shares in the stock market anytime if they need money or want to exit their investment. Less flexible; must wait until maturity, though some debentures can be traded in the bond market. N/A


Conclusion

Both shareholders and debenture holders play crucial roles in a company's financial ecosystem, but their rights, risks, and potential returns differ significantly. Shareholders are owners who take on more risk for the potential of higher returns and a say in the company's affairs. Debenture holders are lenders who prefer a more stable, predictable return on their investment without the complexities of ownership.

Understanding these differences is crucial for making informed investment decisions. Whether you choose to be a shareholder or a debenture holder depends on your financial goals, risk tolerance, and investment strategy. Remember, a balanced investment portfolio often includes a mix of both equity (shares) and debt (debentures) to manage risk and optimise returns.
 

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