ASSIGNMENT

ON
SHARES AND DEBENTURES
SUBMITTED TO:
SHRI GURU RAM RAI UNIVERSITY
In The Partial Fulfilment Of The Requirement Of The Award Of The
Degree Of
B.com Hons. Submitted By:
DILPREET KAUR

Under The Guidance Of

Mr. SHAILENDRA SINGH SAINWAL
Assistant Professor
(Batch : 2020-2023)
COLLEGE OF MANAGEMENT AND COMMERCE
SGRR UNIVERSITY
 ACKNOWLEDMENT

I am very grateful because I managed to complete the Corporate Accounting

assignment within time given by my lecturer Mr. Shailendra Singh Sainwal.
This assignment cannot be completedwithout the efforts and cooperation of
my lecturer.

The success and final outcome of this assignment required a lot of

guidance and assistance from many people. I respect and thank my lecturer
Mr. Shailendra Singh Sainwal for giving me on opportunity to do this
assignment work and providing us all support and guidance which made
me to complete my assignment on time. Last but not the least I also want
to thank myfamily and friends for helping me in making this assignment.
Introduction
Shares and debentures both are ways to raise capital however debentures are borrowed
capital whereas shares are a portion of the company’s capital itself. Covered ahead are
their key differences between shares and debentures for your understanding.

Nowadays, investment in shares and debentures has taken a dominant position in the society,
as people of different ages, religion, sex, and race invest their hard earned money, with an
aim of getting better returns. While Shares refers to the share capital of the company. It
describes the right of the holder to the specified amount of the share capital of the company.

Conversely, debenture implies a long-term instrument showing the debt of the company
towards the external party. It yields a definite rate of interest, issued by the company, may or
may not be secured against assets, i.e. stock.

So, if you are going to invest in any of the two securities, you should first understand their
meaning. In this assignment, I am providing you the difference between shares and
debentures.
Shares
Shares are units of equity ownership interest in a corporation that exist as a financial asset
providing for an equal distribution in any residual profits, if any are declared, in the form
of dividends. Shareholders may also enjoy capital gains if the value of the company rises.

Shares represent equity stock in a firm, with the two main types of shares being common
shares and preferred shares. As a result, "shares" and "stock" are commonly used
interchangeably.

Types Of Shares
 Equity shares
 Preference shares

Equity Shares
Equity shares are long-term financing sources for any company. These shares are issued to

the general public and are non-redeemable in nature. Investors in such shares hold the

right to vote, share profits and claim assets of a company. The value in case o f equity

shares can be expressed in various terms like par value, face value, book value and so on.

Types of Equity Shares

Ordinary Shares –
Such shares are issued by a company to procure funds to meet long-term expenses borne

by a business. They have associated ownership benefits provided to an investor, wherein

the individual gains exposure to various management segments involved in running

operations. An individual possessing a large number of these types of equity shares have

substantial voting rights.

Preference Equity Shares –
Preference equity shares are generally issued to an investor as a guarantee of the payment

of cumulative dividend before returns are distributed among ordinary shareholders.

However, preference shares do not have any associated voting and membership rights

which are provided on common shares.

Classification among preference shares can also be made, depending upon its participating

or non-participating capacity. If an investor purchases participating preference shares,

he/she is entitled to the stipulated amount of profits, as well as bonus returns, depending

upon the performance of a company during a particular financial year. Owners of non-

participating equity shares are eligible for no such benefits.

Bonus Shares –
These types of equity shares are issued out of retained earnings of a business, wherein the

profits are distributed among investors in the form of an additional stake in a company.

Contrary to other types of equity instruments, bonus shares do not increase total market

capitalisation value of a company. It just represents capitalisation of excess funds

generated from production.

Rights Shares –
These shares are issued by a company to premium investors at a discounted price as an

invitation to increase its stake in the respective business. A firm only sells shares to rights

for a stipulated time to raise the required finances to meet its expenditures incurred.
Features of Equity Shares
Equity shares have the following characteristics, which make it one of the most popular

investment tools in a stock market –

I. Most types of equity shares include voting rights to an investor, allowing him/her

to choose individuals responsible to run the business. Electing efficient

managers allows a company to increase its annual turnover, thereby increasing

investors’ average dividend income.

II. Equity shareholders are eligible to realise additional profits generated by a

company in a fiscal year. This increases the total wealth of individual investors

having a considerable investment in equity shares of a company.

III. Even though equity shares are not repaid until a business closes down, equity

shares already issued can be traded in the secondary capital market. Thus,

investors can withdraw funds from a company upon their discretion. This

ensures massive wealth creation through capital appreciation of such shares.

Why Should You Invest in Equity Shares?

Investing in best equity shares have the following benefits, such as –

 High Income
Equity share market is an ideal segment of the capital market responsible for the

remarkable income of investors. Wealth creation not only works through capital

appreciation of such securities but also high dividend earnings received by individuals.

 Hedge Against Inflation

Investment in profitable equity shares increases the standard of living of individuals

through asset value appreciation. Money invested in equity shares offer manifold returns,

higher than the rate of erosion of an individual’s purchasing power due to inflation. Thus,
the real value of investments tends to rise over time.
  Portfolio Diversification
Investors having a low aptitude for risk tend to stick with debt instruments, as it is less

volatile. However, stock and bond market fluctuations are inversely related when it comes

to aggregate demand. Thus, when the bond market is underperforming, risk-averse

investors can profit from investment in best equity shares through stock market

investments.

Preference Shares
Preference shares, more commonly referred to as preferred stock, are shares of a company’s
stock with dividends that are paid out to shareholders before common stock dividends are
issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from
company assets before common stockholders. Most preference shares have a fixed dividend,
while common stocks generally do not. Preferred stock shareholders also typically do not
hold any voting rights, but common shareholders usually do.

Features of Preference Shares

Several features have made these financial instruments the chosen vessels for investors.

Most of these characteristics have made them superior earners even during low economic

growth phases. The most attractive features are:

 Preference shareholders have significantly more heft than standard shareholders

of any company. They have the first rights to all dividends paid by the

companies whose shares they own.

 Holders of these shares do not have any voting rights in any business

proceedings. The features, thus, also falls among the major disadvantages of

preference shares. It might seem like a major handicap for any investor;

however, it is precisely the reason why so many companies offer these shares.

The aspect is also similar to debenture owners.

 One feature which is under-advertised is that the dividends are paid to the
shareholders on specific dates. It is not entirely dissimilar to a monthly income.
  If an investor decides to buy a special type of these shares, they should look for

irredeemable preference shares. These shares allow the holder to have a certain

say on their maturity dates.

Different Types Of Preference Shares

 Cumulative And Non-Cumulative Preference Shares Meaning: In the case of

cumulative preference shares, if a particular company doesn’t declare an annual
dividend, the benefit is carried forward to the next financial year. Non-cumulative
preference shares don't provide for receiving outstanding dividends benefits.
 Participating/Non-Participating Preference Share Definition: Participating
preference shares allow shareholders to receive surplus profits, after payment of
dividends by the company. This is over and above the receipt of dividends. Non-
participating preference shares carry no such benefits, apart from the regular receipt
of dividends.
 Convertible/Non-Convertible Preference Shares Meaning: Convertible preference
shares can be converted into equity shares, after meeting the requisite stipulations by
the company’s Article of Association (AoA), while non-convertible preference shares
carry no such benefits.
 Redeemable/Irredeemable Preference Share Definition: A company can
repurchase or claim redeemable preference share at a fixed price and time. These
types of shares are sans any maturity date. Irredeemable preference shares, on the
other hand, have no such conditions.

Preference Shares: Advantages and Disadvantages

Advantages of Preference Shares
Owners of preference shares receive fixed dividends, well before common shareholders see
any money. In either case, dividends are only paid if the company turns a profit. But there is a
wrinkle to this situation because a type of preference shares known as cumulative
shares allow for the accumulation of unpaid dividends that must be paid out at a later date.
So, once a struggling business finally rebounds and is back in the black, those unpaid
dividends are remitted to preferred shareholders before any dividends can be paid to common
shareholders.
Higher Claim one Company Assets
In the event that a company experiences a bankruptcy and subsequent liquidation, preferred
shareholders have a higher claim on company assets than common shareholders do. Not
surprisingly, preference shares attract conservative investors, who enjoy the comfort of the
downside risk protection baked into these investments.

Additional Investor Benefits

A subcategory of preference shares known as convertible shares lets investors trade in these
types of preference shares for a fixed number of common shares, which can be lucrative if the
value of common shares begins climbing. Such participating shares let investors reap
additional dividends that are above the fixed rate if the company meets certain
predetermined profit targets.

Disadvantages of Preference Shares

The main disadvantage of owning preference shares is that the investors in these vehicles
don't enjoy the same voting rights as common shareholders. This means that the company is
not beholden to preferred shareholders the way it is to traditional equity shareholders.
Although the guaranteed return on investment makes up for this shortcoming, if interest rates
rise, the fixed dividend that once seemed so lucrative can dwindle. This could cause buyer's
remorse with preference shareholder investors, who may realize that they would have fared
better with higher interest fixed-income securities.

Debentures
A debenture is a type of bond or other debt instrument that is unsecured by collateral. Since
debentures have no collateral backing, they must rely on the creditworthiness and reputation
of the issuer for support. Both corporations and governments frequently issue debentures to
raise capital or funds.

Advantages and Disadvantages of Debentures

Advantages of Debentures

 Investors who want fixed income at lesser risk prefer them.

 As a debenture does not carry voting rights, financing through them does not
dilute control of equity shareholders on management.

 Financing through them is less costly as compared to the cost of preference or

equity capital as the interest payment on debentures is tax deductible.

 The company does not involve its profits in a debenture.

  The issue of debentures is appropriate in the situation when the sales and earnings
are relatively stable.

Disadvantages of Debentures

 Each company has certain borrowing capacity. With the issue of debentures, the
capacity of a company to further borrow funds reduces.

 With redeemable debenture, the company has to make provisions for repayment
on the specified date, even during periods of financial strain on the company.

 Debenture put a permanent burden on the earnings of a company. Therefore, there

is a greater risk when the earnings of the company fluctuate.

Types of Debenture

1. Secured and Unsecured:

Secured debenture creates a charge on the assets of the company, thereby mortgaging
the assets of the company. Unsecured debenture does not carry any charge or security on the
assets of the company.

2. Registered and Bearer:

A registered debenture is recorded in the register of debenture holders of the company. A regular
instrument of transfer is required for their transfer. In contrast, the debenture which is
transferable by mere delivery is called bearer debenture.

3. Convertible and Non-Convertible:

Convertible debenture can be converted into equity shares after the expiry of a specified period.
On the other hand, a non-convertible debenture is those which cannot be converted into equity
shares.

4. First and Second:

A debenture which is repaid before the other debenture is known as the first debenture. The
second debenture is that which is paid after the first debenture has been paid back.
Difference between Shares And Debentures

BASIS FOR
SHARES DEBENTURES
COMPARISON

Meaning The shares are the owned funds The debentures are the borrowed
of the company. funds of the company.

What is it? Shares represent the capital of Debentures represent the debt of
the company. the company.

Holder The holder of shares is known as The holder of debentures is known

shareholder. as debenture holder.

Status of Holders Owners Creditors

Form of Return Shareholders get the dividend. Debenture holders get the interest.

Payment of return Dividend can be paid to Interest can be paid to debenture

shareholders only out of profits. holders even if there is no profit.

Allowable deduction Dividend is an appropriation of Interest is a business expense and

profit and so it is not allowed as so it is allowed as deduction from
deduction. profit.

Security for payment No Yes

Voting Rights The holders of shares have The holders of debentures do not
voting rights. have any voting rights.

Conversion Shares can never be converted Debentures can be converted into

into debentures. shares.

Repayment in the event Shares are repaid after the Debentures get priority over
of winding up payment of all the liabilities. shares, and so they are repaid
before shares.
 BASIS FOR
SHARES DEBENTURES
COMPARISON

Quantum Dividend on shares is an Interest on debentures is a charge

appropriation of profit. against profit.

Trust Deed No trust deed is executed in case When the debentures are issued to
of shares. the public, trust deed must be
executed.
Conclusion
Shares and debentures are very different in their structure and characteristics. If you

distinguish between shares and debentures, both are superior in their own ways. While

shares give you a share in the profits, debentures give you priority in the case the company

is getting wound up. Both are ways to be invested in a company are at two fags ends of a

curve. Understand your own personal investment profile and choose what suits you best.