ACCOUNTING FOR SHARE CAPITAL

The word ‘company’ is derived from the Latin word (Com=with or together; panis
=bread), and it originally referred to an association of persons who took their meals
together.

“Company” in the common usage refers to a voluntary association of individuals formed for
the purpose of attaining a common social or economic end. Strictly speaking, the term
“Company” has no technical or legal meaning. In the common law, a company is a juristic
personality or legal person separate from its members. Thus, it exists only in the
contemplation of law.

As per Section 2(20) of the companies Act, 2013 provides that “company means a
company incorporated under this Act or under any previous company law.”

According to Prof. Haney: A company is an artificial person created by law, having separate
entity, with a perpetual succession and common seal.

Characteristics (Features) of a company

1. The certificate of incorporation of a company is issued by registrar of companies as per
procedure/guidelines given in the Companies Act, 2013. The law considers a company as an
artificial legal person.
2. A Company is a separate legal entity from its owner (shareholders).
3. A company has perpetual existence, not affected by the death, lunancy or insolvency of its
shareholders. It can be wounded up only by the law (Court or registrar of company.)
4. Every company has it own common seal, which act as the official signature of the company.
5. The shares of a company is transferable subject to certain conditions (e.g. some
conditions for private company.)
6. The company is managed by the ‘Board of Directors’, the directors are representative of
the shareholders (owners). So, management and ownership are separate in company
organization.
7. The liability of a shareholder is limited upto the nominal price of shares subscribed by
one.

Types of Companies
(i) Private Company – Section 2 (68) of the Companies Act, 2013 defines “A private Company
means a company which has a minimum paid up capital of Rs. 100,000 and which by its
Articles of Association –
(a) restricts the right to transfer its shares;
(b) limits the number of its members to 200 excluding its part or present employee
members;
(c) Prohibits any invitation to public to subscribe for any of its securities.

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(ii) Public Company – According to section 2 (71) of the Companies Act, 2013 a public
company means a company which is not a private company and has a minimum paid up capital
of L 500,000 or higher capital as may be prescribed a private company which is a subsidiary
of a company not being a private company shall be deemed a public company.

(iii) One Person Company – Section 2 (62) of the Companies Act, 2013 states one person
company is a company which has only one person as a member. Rule 3 of the Companies (In
Corporation) Rules, 2014 provides that (i) only on Indian citizen resident in India can form
one person company (ii) Its paid up capital is not more than 50 lakhs; (iii) Its Average annual
turnover should not exceed Rs. 2 crores; (iv) It cannot carry out Non banking financial
Investment activities.

Shares:
Share may be defined as an interest in the company entitling the owner thereof to receive
proportionate part of the profits, if any, and, at the’ same time, proportionate part of the
assets of the company in case of liquidation.

It can also be expressed as certain invisible units of a fixed amount, i.e., the units are known
as ‘shares’. It is the interest of a shareholder in the company measured, by a sum of money
for the purpose of liability in the first place, and of interest in the second but also
consisting of a series of mutual covenants entered into-by all the shareholders.

It may be defined as “an interest having a money value and made up of diverse rights
specified under the Articles of Association.” In this context it is needless to mention that
it has got certain rights and liabilities when the company is a going concern or the company is
being wound-up.
According to Indian Companies Act, 2013, the shares of a company may be divided into
the following categories:

Types of Shares:
1. Equity Shares:
The holders of such shares participate in divisible profits only after the claims are met of
the preference shareholders, i.e., they actually do not enjoy any preferential right either in
respect of dividend or in respect of repayment of capital. They are entitled to receive
dividend recommended by the directors and declared by the company in general meeting.

Act states that equity shares are those shares which are not preference shares. The rights
and privileges of equity shareholders are laid down in the articles subject to the provisions
of the Act.

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Features/Characteristics of Equity Shares:
The characteristics of Equity Shares are:
(a) It does not have any maturity date.
(b) It does not saddle the company with a legal requirement about the payment of
dividend.
(c) Equity share financing relieves the company from certain restrictions given by the
preference shareholders or the creditors.
(d) Payment of dividend to issue by shareholders is subject to dividend tax @ 10% as
per Income Tax Act, 1961.
(e) It enjoys the voting rights.
(f) It enjoys the right to sell or transfer the shares.
(g) It enjoys residual claims on assets of the company.
(h) It has got the right to receive the Annual Report of the company.
(i) It has got the preemptive right to subscribe the issue of additional shares, i.e.,
Right Shares,
(j) It consists of a part of share capital of the company.
2. Preference Shares:
Sec. 85(1) notes that a preference share is one which satisfies the following:
a. They have a preferential right to be paid dividend during the lifetime of the
company, and
b. They have a preferential right to the return of capital if the company goes into
liquidation.
Moreover, the preference shareholders are entitled to receive a fixed rate of dividend
before the dividend is received by the equity shareholders in the event of liquidation.
Features/Characteristics of Preference Shares:
The characteristics of Preference Shares are:
(a) It consists of a part of share capital of a company.
(b) Since it is not considered as a debt, no collateral security/mortgage is required.
(c) As per. Sec. 87 of the Companies Act, it enjoys limited voting rights.
(d) It enjoys a fixed rate of dividend.
(e) Preference dividend is a charge against appropriation of profit.
(f) It enjoys a priority income distribution of income and, at the same time, on assets
distribution.
(g) It enjoys the cumulative rights to receive dividends.
(h) It is redeemable after the period of 20 years from the date of issue.
(i) It may or may not be converted into equity shares.
(j) It can be transacted (i.e. purchased/sold) through Stock Exchange.
Types OR Classes of Preference Shares
(a) With Reference to Dividend :
i. Cumulative Preference shares : Cumulative preference shares are these preference
shares, the holders of which are entitled to receive arrears of dividend before any
dividend is paid on equity shares.
ii. Non-cumulative Preference shares: Non-cumulative preference shares are those
preference share, the holders of which do not have the right to receive arrear of

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 divided. If no dividend is declared in any year due to any reason. Such shareholders
get nothing, nor can they claim unpaid dividend in any subsequent years.
(b) With Reference to Participation
i. Participating preference shares: Such shares, in addition to the fixed preference
dividend, carry a right to participate in the surplus profit, if any, after providing
dividend at a stipulated rate to equity shareholders.
ii. Non-Participating preference shares: Such shares get only a fixed rate of
dividend every year and do not have a right to participate in the surplus profit.

(c) With Reference to Convertibility

i. Convertible preference shares: are those preference shares which have the
right/option to be converted into equity shares.
ii. Non-convertible preference shares: are those preference shares which do not
have the right/option to be converted into Equity shares.
(d) With Reference to Redemption
i. Redeemable preference shares: are those preference shares the amount of which
can be redeemed by the company at the time specified for their repayment or earlier.
ii. Irredeemable preference shares: are those preference shares the amount of
which cannot be refunded by the company unless the company is wound up. Now a
company cannot issue irredeemable preference shares.

BASIS FOR
EQUITY SHARES PREFERENCE SHARES
COMPARISON

Meaning Equity shares are the
ordinary shares of the
company representing the
part ownership of the
shareholder in the company.
Preference shares are the shares that
carry preferential rights on the matters
of payment of dividend and repayment of
capital.

Payment of The dividend is paid after Priority in payment of dividend over

dividend the payment of all liabilities. equity shareholders.

Repayment of In the event of winding up In the event of winding up of the

capital of the company, equity company, preference shares are repaid
shares are repaid at the before equity shares.
end.

Rate of dividend Fluctuating Fixed

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BASIS FOR
EQUITY SHARES PREFERENCE SHARES
COMPARISON

Redemption No Yes

Voting rights Equity shares carry voting Normally, preference shares do not
rights. carry voting rights. However, in special
circumstances, they get voting rights.

Convertibility Equity shares can never be Preference shares can be converted into
converted. equity shares.

Arrears of Equity shareholders have no Preference shareholders generally get

Dividend rights to get arrears of the
dividend for the previous
years.
the arrears of dividend along with the
present year's dividend, if not paid in
the last previous year, except in the
case of non-cumulative preference
shares.

Capital : means amount invested in the business for the purpose of earning revenue. In case
of company money is contributed by public and people who contributed money are called
shareholders.
Share Capital : Capital raised by issue of shares is called share capital.

Authorised Capital: Authorised capital is the amount of share capital which a company
is authorised to issue by its Memorandum of Association. The company cannot raise
more than the amount of capital as specified in the Memorandum of Association. It is
also called Nominal or Registered capital. The authorised capital can be increased or
decreased as per the procedure laid down in the Companies Act. It should be noted
that the company need not issue the entire authorised capital for public subscription
at a time. Depending upon its requirement, it may issue share capital but in any case, it
should not be more than the amount of authorised capital.

Issued Capital: It is that part of the authorised capital which is actually issued to the
public for subscription including the shares allotted to vendors and the signatories to
the company’s memorandum. The authorised capital which is not offered for public
subscription is known as ‘unissued capital’. Unissued capital may be offered for public
subscription at a later date.

Subscribed Capital: It is that part of the issued capital which has been actually
subscribed by the public. When the shares offered for public subscription are
subscribed fully by the public the issued capital and subscribed capital would be the
same. It may be noted that ultimately, the subscribed capital and issued capital are

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 the same because if the number of share, subscribed is less than what is offered, the
company allot only the number of shares for which subscription has been received. In
case it is higher than what is offered, the allotment will be equal to the offer. In
other words, the fact of over subscription is not reflected in the books.

Called up Capital: It is that part of the subscribed capital which has been called up on
the shares. The company may decide to call the entire amount or part of the face
value of the shares. For example, if the face value (also called nominal value) of a
share allotted is Rs. 10 and the company has called up only Rs. 7 per share, in that
scenario, the called up capital is Rs. 7 per share. The remaining Rs. 3 may be collected
from its shareholders as and when needed.

Paid up Capital: It is that portion of the called up capital which has been actually
received from the shareholders. When the shareholders have paid all the call amount,
the called up capital is the same to the paid up capital. If any of the shareholders has
not paid amount on calls, such an amount may be called as ‘calls in arrears’. Therefore,
paid up capital is equal to the called-up capital minus call in arrears.

Uncalled Capital: That portion of the subscribed capital which has not yet been called
up. As stated earlier, the company may collect this amount any time when it needs
further funds.

Reserve Capital: A company may reserve a portion of its uncalled capital to be called
only in the event of winding up of the company. Such uncalled amount is called ‘Reserve
Capital’ of the company. It is available only for the creditors on winding up of the
company.

Shares Issued at Premium:

When the company decides to issue shares at a price higher than the nominal value or
face value we call it shares issued at a premium. It is quite a common practice especially when
the company has a great track record and strong financial performances and standing in the
market.
So say the face value of a share is Rs 100/- and the company issues it at Rs 110/-. The
share is said to have been issued at a 10% premium. The premium will not make a part of the
Share Capital account but will be reflected in a special account known as the Securities
Premium Account. This account is found under the heading of Reserves and Surplus on the
liabilities side of the Balance Sheet.
Now according to the Companies Act 2013, there are some laws about the utilization of the
Securities Premium Account. It states the specific purposes for which this balance may be
used. So the account can only be used for such specific purposes and no other purpose.
• To issue fully paid-up bonus shares to its existing shareholders. However, you cannot
exceed the limit of the unissued share capital of the company.
• Securities premium Account can be used for writing off any preliminary expenses of
the company.
• To write off expenses of issue of shares and debentures, such as commission paid or
discount given on the issue of shares.
• The balance can also be used to provide for the premium that is payable on the
redemption of debentures or of preference shares of the company.

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 • And finally, it can be utilized by the company to buy back its own shares.

Issue of Shares at a Discount:

When shares are issued at a price lower than the face value, they are said to be
issued at discount. Thus, the excess of the face value over the issue price is the amount of
discount. For example, if a share of Re10 is issued at Re9 then Re(10 – 9) = Re. 1 is the
discount.
As per companies Act 2013, a company shall not issue shares at a discount except as
provided in section 54 for issue of sweat equity shares. Any share issued by a company at a
discounted price shall be void.
Where a company contravenes the provisions of this section, the company shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to
five lakh rupees and every officer who is in default shall be punishable with imprisonment for
a term which may extend to six months or with fine which shall not be less than one lakh
rupees but which may extend to five lakh rupees, or with both.

UNDER-SUBSCRIPTION OF SHARES:
In actual practice, it rarely happens that the number of shares applied for is exactly
equal to the number of shares offered to public for subscription. If the number of shares
applied for is less than the number of shares issued the shares are said to be
undersubscribed. When an issue is under-subscribed, entries are made on the basis of
number of shares applied for, provided the minimum subscription is raised and the company
proceeds to allot the shares.

‘pro-rata’ allotment:
When the directors opt to make a proportionate allotment to all applicants (called ‘pro-rata’
allotment), the excess application money received is normally adjusted towards the amount
due on allotment. In case, the excess application money received is more than the amount due
on allotment of shares, such excess amount may either be refunded or credited to calls in
advance.
For example: in the event of applications for 20,000 shares being invited and those received
are for 25,000 shares, it is decieded to allot shares in the ratio of 4:5 to all applicants. It is
a case of pro-rata allotment and the excess application money received on 5,000 shares
would be adjusted towards the amount due on the allotment of 20,000 shares

Over Subscription of Shares:

When the number of shares applied for, is more than the number of shares offered for
subscription, the shares are said to be oversubscribed. Allotment of shares cannot be made
to all the applicants in full.
In case of oversubscription, following three alternatives are available:
(i) Rejection of applications
(ii) Partial or pro-rata allotment
(iii) Combination of pro-rata allotment and rejection
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Calls-in-Advance and Interest on Calls-in-Advance:
If authorised by the articles, a company may receive from a shareholder the amount
remaining unpaid on shares, even though the amount has not been called up. This is known as
calls-in-advance. It is a debt of a company until the calls are made and the amount already
paid is adjusted.
Calls-in-advance may also arise when the number of shares allotted to a person is much
smaller than the number applied for and the terms of issue permit the company to retain the
amount received in excess of application and allotment money. Of course, the company can
retain only so much as is required to make the allotted shares fully paid ultimately.
When calls are made, the calls-in-advance account is ultimately closed by transfer to
the relevant call accounts. It is noted that the money received on calls-in-advance does not
become part of share capital. It is shown under a separate heading, namely ‘calls-in-advance’
on the liabilities side. No dividend is paid on calls-in-advance.
Table F of the Companies Act, 2013 will be applicable which leaves the matter to
the Board of directors subject to a maximum rate of 12% p.a.

Accounting Treatment
(i) On receipt of call money in advance:
Bank Dr. (with the amount of call money received in advance)
To Call-in-Advance A/c
(Being the calls received in advance)
(ii) As and when calls are made:
Calls-in-Advance A/c Dr. (with the amount adjusted on relevant call becoming due)
To Relevant Call A/c
(iii) If Interest on Calls-in-Advance is paid in cash –
Interest on Calls-in-Advance A/c Dr. (with the amount of interest paid)

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 To Bank
(Interest on Calls-in-Advance paid @ .....% p.a. on Rs........... for............ months)
(iv) If interest on Calls-in-Advance is not paid in cash –
Interest on Calls-in-Advance A/c Dr. (with the amount of interest payable)
To Sundry Shareholders A/c
(v) At the end of the year, when interest on Calls-in-Advance is transferred to Profit and
Loss A/c –
Profit and Loss A/c Dr. (with the amount of interest )
To Interest on Calls-in-Advance A/c

Calls in Arrear and Interest on Calls in Arrear:

When calls are made upon shares allotted, the shareholders holding the shares are
bound to pay the call money within the date fixed for such payment. If a shareholder makes
a default in sending the call money within the appointed date, the amount thus failed is called
Calls-in-Arrear.
The interest on Calls-in-Arrear is recoverable according to the provisions in this
regard in Articles of the company. But if the Articles are silent, Table ‘F’ of Schedule I of
the Companies Act, 2013, shall be applicable which prescribes that if a sum called in respect
of shares is not paid before or on the day appointed for payment, the person who failed to
pay shall pay thereof from the day appointed for payment to the time of actual payment at a
rate not exceeding 10% per annum. However, the directors have the right to waive the
payment of interest on Calls-in Arrear. The interest on Calls-on-Arrear Account is
transferred to the Profit and Loss Account at the end of the year.

Journal Entries
(i) When call money is in arrear:
Calls-in-Arrear A/c Dr. (with the amount-failed by the shareholders)
To Relevant Call A/c
(ii) On receipt of amount of Calls-in-Arrear with interest, on a subsequent date:
Bank Dr. (with the amount received)
To Calls-in-Arrears A/c

Forfeiture of Shares: It may happen that some shareholders fail to pay one or more
instalments, viz. allotment money and/or call money. In such circumstances, the company can
forfeit their shares, i.e. cancel their allotment and treat the amount already received
thereon as forfeited to the company within the framework of the provisions in its articles.

The journal entry will be as follows:

(A) Forfeiture of Shares issued at Par:
Share Capital A/c..........(Called up amount) Dr.
To Share Forfeiture A/c...........(Paid up amount)
To Share Allotment A/c
To Share Calls A/c (individually)
(..... shares forfeited for non-payment of allotment money and calls made)

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(B) Forfeiture of Shares issued at Premium:
Share Capital A/c Dr.
Securities Premium A/c Dr.
To Share Forfeiture A/c
To Share Allotment A/c
and/or
To Share Calls A/c (individually)
(..... shares forefeited for non-payment of allotment money and calls made)
Note: If Calls in Arrears Account is maintained, Calls in Arrears Account is credited
and not the Share Allotment and/or Share Call/Calls Accounts.

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 ACCOUNTING FOR DEBENTURE
A Debenture is a unit of loan amount. When a company intends to raise the loan amount
from the public it issues debentures. A person holding debenture or debentures is called a
debenture holder. A debenture is a document issued under the seal of the company. It is an
acknowledgment of the loan received by the company equal to the nominal value of the
debenture. It bears the date of redemption and rate and mode of payment of interest. A
debenture holder is the creditor of the company.

Types of debentures
Debenture can be classified as under:

1. From security point of view:-

(i) Secured or Mortgage debentures : These are the debentures that are secured by a charge
on the assets of the company. These are also called mortgage debentures. The holders of secured
debentures have the right to recover their principal amount with the unpaid amount of interest on
such debentures out of the assets mortgaged by the company.

(ii) Unsecured debentures : Debentures which do not carry any security with regard to the
principal amount or unpaid interest are called unsecured debentures. These are called simple
debentures.

2. On the basis of redemption

(i) Redeemable debentures: These are the debentures which are issued for a fixed period. The
principal amount of such debentures is paid off to the debenture holders on the expiry of such
period. These can be redeemed by annual drawings or by purchasing from the open market.

(ii) Non-redeemable debentures: These are the debentures which are not redeemed in the life
time of the company. Such debentures are paid back only when the company goes into
liquidation.

3. On the basis of Records

(i) Registered debentures: These are the debentures that are registered with the company.
The amount of such debentures is payable only to those debenture holders whose name appears
in the register of the company.
(ii) Bearer debentures: These are the debentures which are not recorded in a register of the
company. Such debentures are transferrable merely by delivery. Holder of these debentures is
entitled to get the interest.

4. On the basis of convertibility

(i) Convertible debentures: These are the debentures that can be converted into shares of the
company on the expiry of predecided period. The term and conditions of conversion are generally
announced at the time of issue of debentures.
(ii) Non-convertible debentures: The debenture holders of such debentures cannot convert
their debentures into shares of the company.
5. On the basis of priority
(i) First debentures : These debentures are redeemed before other debentures.
(ii) Second debentures : These debentures are redeemed after the redemption of first debentures.

ISSUE OF DEBENTURES:

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 By issuing debentures means issue of a certificate by the company under its seal which is
an acknowledgment of debt taken by the company.
The procedure of issue of debentures by a company is similar to that of the issue of shares.
A Prospectus is issued, applications are invited, and letters of allotment are issued. On rejection of
applications, application money is refunded. In case of partial allotment, excess application money
may be adjusted towards subsequent calls.

Issue of Debenture takes various forms which are as under :

1. Debentures issued for cash
2. Debentures issued for consideration other than cash
3. Debentures issued as collateral security.

Further, debentures may be issued

(i) at par,
(ii) at premium, and
(iii) at discount

Accounting treatment of issue of debentures for cash

1. Debentures issued for cash at par:

Following journal entries will be made:
(i) Application money is received
Bank A/c Dr
To Debentures Application A/c
(Application money received for Debentures)
(ii) Transfer of debentures application money to debentures account on their
allotment
Debentures Application A/c Dr
To Debentures A/c
(Application money transferred to debenture account on allotment)
(iii) Money due on allotment
Debentures Allotment A/c Dr
To Debentures A/c
(Allotment money made due)
(iv) Money due on allotment is received
Bank A/c Dr
To Debentures Allotment A/c
(Receipt of Debenture allotment money)
(v) First and final call is made
Debentures First and Final call A/c Dr
To Debentures A/c
(First and Final call money made due on ............... debentures)
(vi) Debentures First and Final call money is received
Bank A/c Dr
To Debentures First and Final call A/c
(Receipt of Amount due on call)
Note : Two calls i.e. first call and second call may be made
Journal entries will be made on the lines made for first and final call.

Over subscription

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 Company if receives applications for number of debentures that exceed the number of
debentures offered for subscription, it is called over subscription. There can be following
treatment of the excess application money received:

(a) The total amount of excess number of applications is refunded in case the applications are
totally rejected.

(b) The amount of excess application money is totally adjusted towards amount due on allotment
and calls
• in case partial allotment is made,
• the excess amount is adjusted towards sums due on allotment and rest of the amount is
refunded.
Journal entries in the above cases will be as follows :
1. For refund of money if the applications are rejected
Debentures Application A/c Dr
To Bank A/c
(Refund of money on rejected applications)
2. For adjustment of excess application money adjusted towards sum due on allotment
Debentures Application A/c Dr
To Debentures Allotment A/c
(Excess application money adjusted)

ISSUE OF DEBENTURES AT PREMIUM

Debentures are said to be issued at premium when these are issued at a value which is
more than their nominal value. For example, a debenture of Rs 100 is issued at Rs 110. This
excess amount of Rs 10 is the amount of premium. The premium on the issue of debentures is
credited to the Securities Premium A/c.

Journal entry will be as follows:

Debentures Allotment A/c Dr
To Debentures Account
To Securities Premium A/c
(Amount due on allotment alongwith premium of Rs ....)

Issue of Debentures at Discount

When debentures are issued at less than their nominal value they are said to be issued at
discount. For example, debenture of Rs 100 each is issued at Rs 90 per debenture.
Journal entry for issue of debentures at discount (at the time of allotment)
Debentures Allotment A/c Dr
Discount on issue of debentures A/c Dr
To Debentures A/c
(Allotment money due. The amount of discount is @ Rs .... per debenture)

Issue of Debentures for consideration other than cash

When a company purchases some assets and issues debentures as a payment for the
purchase, to the vendors it is known as issue of debentures for consideration other than cash.
Debentures can be issued to vendors at par, at premium and at discount.
Accounting Treatment :
1. Purchase of Assets
Sundry Assets A/c Dr (Individually)
To Vendors A/c

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 (Purchase of assets)
2. Allotment of debentures
Vendors' A/c Dr
Debentures Discount A/c Dr
To Debentures A/c
To Securities Premium A/c
(issue of debentures to vendors)

ISSUE OF DEBENTURES AS COLLATERAL SECURITY

Collateral security means security given in addition to the principal security. It is a
subsidiary or secondary security. Whenever a company takes loan from bank or any financial
institution it may issue its debentures as secondary security which is in addition to the principal
security. Such an issue of debentures is known as ‘issue of debentures as collateral security’. The
lender will have a right over such debentures only when company fails to pay the loan amount
and the principal security is exhausted. In case the need to exercise this right does not arise
debentures will be returned back to the company. No interest is paid on the debentures issued as
collateral
security because company pays interest on loan.
In the accounting books of the company issue of debentures as collateral security can be
credited in two ways.
(i) No journal entry to be made in the books of accounts of the company:
Debentures are issued as collateral security. A note of this fact is given on the liability side of the
balance sheet under the heading Secured Loans and Advances.

(ii) Entry to be made in the books of account the company

A journal entry is made on the issue of debentures as a collateral security, Debentures
suspense A/c is debited because no cash is received for such issue.
Following journal entry will be made
Debenture Suspense A/c Dr
To Debentures A/c
(.....Debentures of Rs .... each issued as collateral security to .....)
In the Balance sheet of the issuing company it will be shown as udner :

BASIS FOR
SHARES DEBENTURES
COMPARISON

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

What is it? Shares represent the Debentures represent the

capital of the company. debt of the company.

Holder The holder of shares is The holder of debentures is

known as shareholder. known as debenture holder.

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 BASIS FOR
SHARES DEBENTURES
COMPARISON

Status of Holders Owners Creditors

Form of Return Shareholders get the Debenture holders get the

dividend. interest.

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

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

Allowable deduction Dividend is an Interest is a business

appropriation of profit expense and so it is allowed
and so it is not allowed as as deduction from profit.
deduction.

Security for payment No Yes

Voting Rights The holders of shares have The holders of debentures do

voting rights. not have any voting rights.

Conversion Shares can never be Debentures can be converted

converted into into shares.
debentures.

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

Quantum Dividend on shares is an Interest on debentures is a

appropriation of profit. charge against profit.

Trust Deed No trust deed is executed When the debentures are

in case of shares. issued to the public, trust
deed must be executed.

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