Defining Shares and Distinguishing Shares from Debentures
Before delving into the distinctions between shares and debentures, let us first understand the concept of 'Shares' under the Companies Act, 2013.
A share, as defined under Section 2(84) of the Companies Act, 2013, represents a unit into which the total share capital of a company is divided. It signifies a fraction of the company's capital and provides the holder with a proportionate claim on the company's profits and assets. A share is essentially an interest that a shareholder possesses in the company, signifying a right to a portion of the profits if declared in the form of dividends, and a claim on the surplus in the event of liquidation.
Distinguishing Shares and Debentures
Once we understand the concept of shares, we can delve into the distinguishing shares and debentures. Both are instruments that companies use to raise capital, but they come with different rights and obligations.
Nature of Instrument: Shares represent ownership in a company. In contrast, debentures symbolize debt. When an investor purchases a share, they become a part-owner of the company. However, when an investor buys a debenture, they become a creditor to the company.
Dividends and Interest: Shareholders are entitled to dividends, which are a part of the company's profits. However, dividends are not a legal obligation and depend on the company's performance and discretion of the board. On the other hand, debenture holders receive interest at a fixed rate, which is a legal obligation the company must fulfill, irrespective of its profits or losses.
Security: Debentures may be secured against the assets of the company. In contrast, shares do not provide any such security. In case of winding up, debenture holders are paid before shareholders.
Voting Rights: Shareholders, particularly equity shareholders, possess voting rights in the company and can participate in the decision-making process. Debenture holders, however, do not have voting rights.
Return on Investment: The return on shares is generally considered to be higher since it is linked to the company's profits. However, it also involves more risk. Debentures offer a lower, but more steady and assured return.
Relevant Case Laws
Bacha F. Guzdar v. Commissioner of Income Tax, Bombay: The Supreme Court of India held that the holder of a share is the owner of a part of the corporate property.
State of U.P v. Renusagar Power Co.: The Supreme Court held that debenture holders are considered creditors of the company.
To sum it up, shares represent the ownership in a company and confer upon the holder the right to share in the profits, along with voting rights. Debentures, on the other hand, signify a debt obligation, offering a fixed return with greater security but without voting rights. Therefore, the choice between investing in shares or debentures largely depends on the investor's risk appetite and return expectations.