The basic difference between debenture and Preference share is of type. A debenture is a type of loan but preference share is the type of capital. To know the difference between these two, we must clear the meaning of these terms and explained as follows: –
Meaning of Debenture:
The Debenture is the type of loan or debt instrument which is issued in the market to subscribe to the public. It is not taken from any individual institution. It is issued like equity or preference shares in the market for purchase and sale to the number of subscribers. Like every type of loan, it also has a fixed rate of interest which will be paid by the company to the subscriber of these debentures. The subscriber of the debenture is known as the Debenture holder.
Definition of Debenture:
“Debenture includes debentured stock, bonds, and any other instrument of the company evidencing a debt, whether constituting a charge on the assets of the company or not.”
– Section 2(30) of the Companies Act, 2013
“A debenture is a document given by a company as evidence of a debt to the holder usually arising out of a loan and most commonly secured by a charge.”
-Topham
Meaning of Preference Shares:
The shares of ownership which are carrying some preference are known as preference share capital. The preference is mainly of a fixed rate of dividend, fixed repayment date, after fixed time convertible to equity shares. The dividend of the preference shareholders is paid before the dividend on equity shares.
“(b) preference share capital:
Provided that nothing contained in this Act shall affect the rights of the preference shareholders who are entitled to participate in the proceeds of winding up before the commencement of this Act.”
– Section 43 subsection (b) for the Indian Companies Act, 2013
Chart of Difference between debenture and Preference share: –
Basis of Difference |
Debenture |
Preferences Share |
| Meaning | The Debenture is the type of loan or debt instrument which is issued in the market to subscribe to the public. | The shares capital which is carrying a fixed rate of dividends and preference to repayment known as preference shares. |
| Types | It is a type of loan. | It is a type of Capital. |
| Rate of Return | It has a fixed rate of Return which is known as Interest. | It has a fixed rate of Return which is known as Dividend. |
| Secured | It may or may not be secured against the assets. | it is not secured but has a preference for repayment. |
| Voting Rights | It does not have voting rights. | It does have voting rights. |
| Convertibility | It can be convertible after maturity into an Equity share as well as a preference share. | It can be convertible into an equity share. |
| Risk | Debenture holders are relatively safe. | Shareholders are at a greater risk. |
| Repayment | will be repaid after a specific period. | it will not be repaid through the whole life of the business. |
| Priority as to Repayment | In the case of winding up of the company the payment made to debenture holders before the payment of made to preference shareholders. | In the case of winding up of the company the payment made to the preference shareholders before the payment to equity shareholders. |
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Conclusion:
Thus, both terms have the only main difference between the type and repayment of terms. But these both terms are related to the generation of funds for the expansion of the business.
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