A company may raise money in one of two ways: by issuing stock shares or debt instruments. Although each approach has the same final objective, they differ in many important aspects. The holders of the company’s shares or debt instruments are one such difference. And that’s just what we’ll be exploring in this essay.
Who are Shareholders?
Recently, the shareholders and creditors of National Mineral Development Corporation (NMDC) agreed to the demerger of its under-construction Nagarnar Steel Plant (NSP), according to its Chairman and Managing Director Sumit Deb.
But why did the mineral producer company require the shareholders’ permission? Are they right to be included in the decision-making process of the company? Do they own the company? Well, yes!
An entity holding at least one share of a company’s stock or unit in a mutual fund is a shareholder. Someone who owns stock in a company, say, ITC Ltd, is an example of a shareholder.
Shareholders essentially own the company and also have specific rights and obligations. With this ownership structure, they can benefit from a company’s success.
These benefits take the shape of rising stock prices or dividend payments from financial gains. In contrast, when a company experiences a loss, the share price inevitably falls, resulting in financial losses for shareholders or declines in the portfolio.
The owners of a company’s common stock are known as common shareholders. They are the most common kind of stockholders and have the right to vote for decisions affecting the company. They have the authority to sue the business as a group for any misconduct that might endanger the organization since they have control over how it is run.
On the other side, preferred stockholders are relatively uncommon. They own a share of the company’s preferred stock, as opposed to common shareholders, and have no voting rights or influence over how the business is run. Instead, they are qualified for a set annual dividend that will be paid before the common shareholders receive their portion.
Even while both common and preferred stock sees an increase in value in response to the company’s success, the former is more likely to experience capital gains or losses.
Who are Debenture Holders?
In FY19, Reliance Capital pledged the shares in its unit RGI as security against funds raised by group companies via the issue of debentures. However, IDBI Trusteeship, custodian of the RGI shares, stated the debenture holders are not permitting it to release the pledged shares.
Why did Reliance Capital pledge its shares as collateral? Why did it issue debentures? Read on to understand better.
A debenture holder is a person or business that has borrowed money from another business using a debenture. A debenture holder receives interest payments at predetermined rates and times.
A bond or other financial instrument secured by collateral is referred to as a debenture. Debentures must rely on the issuer’s trustworthiness and reputation for support because they lack collateral backing. Debentures are commonly issued by both businesses and governments to raise funds.
Treasury bonds and treasury bills are examples of debentures. As a result, when a corporation issues treasury bonds or bills as debentures, it is admitting that it has borrowed money from the general public and is promising to pay it back later. For this reason, holders of these treasury bonds and bills are examples of debenture holders.
Debentures are debt securities, making them less risky than buying common stock or preferred shares of the same corporation. During bankruptcy, holders of debentures are regarded as more senior and have priority over those other sorts of investments.
Considering the fact that there is no collateral supporting these debts, they are intrinsically riskier than secured debts. As a result, these may have relatively higher interest rates than comparable, collateral-backed bonds from the same issuer.
Shareholders And Debenture Holders — Comparison
By now, it should be clear that shareholders and holders of debentures are substantially different. However, their distinctions go well beyond simply being owners of different instruments. Here are a few key distinctions between these two categories of holders.
The Key Takeaways
Debentures are the borrowed money of a company, whereas shares are the capital owned by a company. Likewise, the individual who owns shares is referred to as a shareholder, whereas the one who owns debentures is referred to as a debenture holder.
The shareholders are the company’s owners and give financial support in exchange for prospective dividends paid out over the course of the business. The debenture holders have secured creditors of the business and can promote long-term financing for business expansion. Both shareholders and holders of debentures are investors in the business and act as sources of capital for it.
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