Differences between equity shares and debentures
The following are some of the differences between equity shares and debentures
1. Motive of issue
Equity Shares: Equity shares are issued to meet long term financial requirements.
Dividend: Dividend are issued to meet long term and medium term financial requirements.
2. Investor preference
Equity Shares: Generally equity shares are preferred by adventurous investors with risk bearing capacity.
Dividend: Dividend are preferred by cautious investors who are reluctant to take risks.
Equity Shares: Returns (dividends) are not fixed. They are dependent on the profits earned. High returns in case of high profits and low return in case of low profits.
Dividend: Returns (interest) are fixed in nature.
4. Priority in return
Equity Shares: They are residual claimants. They can expect dividends only after interest has been paid on debentures and preference dividend has been paid to preference shareholders.
Dividend: Interest has to be paid to them before any dividend can be distributed.
5. Settlement of claims during liquidation
Equity Shares: Their claims will be settled only after the claims of preference shareholders and debenture can be distributed to holders have been settled.
Dividend: Their claims have to be settled before anything preference or equity shareholders.
6. Financial burden
Equity Shares: Payment of equity dividends is optional. It is dependent on the discretion of the Board of Directors. Therefore there is no fixed financial commitment.
Dividend: Payment of interest on debentures is a fixed financial commitment.
Equity Shares: No redemption until liquidation.
Dividend: Redeemable as per terms of issue.
8. Voting rights
Equity Shares: Enjoy voting rights
Dividend: Do not enjoy voting rights.
9. Reduction of capital
Equity Shares: Reduction of Capital is done by reorganization.
Dividend: Reduction of Capital is done by repayment.
Equity Shares: Generally of lower denomination.
Dividend: Generally of higher denomination
11. Type of investors.
Equity Shares: Even small investors can invest because of the lower denomination
Dividend: Preferred by medium and large investors. Small investors would find it difficult to invest because of the higher denomination
12. Borrowing capacity
Equity Shares: Strengthens borrowing capacity.
Dividend: Reduces borrowing capacity.
Equity Shares: There are chances for over-capitalization.
Dividend: Lesser chances for over-capitalization.
14. Charge on assets
Equity Shares: Does not create charge on the assets.
Dividend: Generally creates charge on the assets of the company.