Do Not Call
Understand how shareholders and debenture holders differ in terms of ownership, returns, rights, and risk exposure.
When evaluating how to invest in a company, investors typically choose between equity and debt instruments. This decision determines whether you become a shareholder or a debenture holder. Both roles offer unique benefits and come with distinct obligations and risk profiles. Understanding these differences is crucial for constructing a balanced portfolio that aligns with one’s financial goals and risk appetite.
Shareholders are individuals or entities that own shares in a company, giving them partial ownership. They have rights to vote on key matters, receive dividends, and benefit from capital gains if the company performs well. Shareholders bear higher risk, as they are paid after all debts in case of liquidation, but they also have the potential for higher returns.
Debenture holders, on the other hand, are lenders to the company. When a company issues debentures, it borrows money from investors under agreed terms and commits to repaying the principal along with interest. These investors do not own any part of the company and do not benefit from its profits beyond the fixed interest income.
Refer the table below:-
Feature |
Shareholder |
Debenture Holder |
|---|---|---|
Ownership |
Partial owner of the company |
Acts as a creditor to the company |
Return Type |
Earns dividends (variable) |
Earns fixed interest |
Voting Rights |
Has voting rights in company matters |
No voting rights |
Risk Level |
Higher risk; paid after debts in liquidation |
Lower risk; repaid before shareholders |
Capital Gain Potential |
Can benefit from share price appreciation |
No capital gain; limited to interest returns |
Repayment Priority |
Paid last during liquidation |
Paid before shareholders in case of liquidation |
A combination of both instruments can offer stability and growth. While equity may outperform over time, debentures provide consistent income and downside protection to your portfolio.
For conservative investors, debentures provide reliable returns. Equities may be more suitable for investors seeking growth over the long term, albeit with higher volatility.
In uncertain or bearish markets, fixed-income securities like debentures tend to perform better due to predictable returns. In bullish periods, shareholders benefit from rising stock prices and potentially higher dividends.
Choosing between being a shareholder or a debenture holder depends on your investment objective—whether it’s capital growth, steady income, or capital preservation. Shareholders embrace ownership and long-term potential but with greater risk. Debenture holders lend money for fixed returns and assume lower risk. A well-structured investment portfolio often blends both to balance risk and reward across market cycles.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
A shareholder is considered a partial owner of the company and has rights such as voting and receiving dividends when declared. A debenture holder, on the other hand, is a lender to the company who receives fixed interest payments and has a higher claim on assets in case the company is liquidated.
No, debenture holders do not have voting rights. Since they are creditors and not equity owners, they do not participate in decision-making processes related to corporate governance.
Debentures are generally considered less risky than shares because they offer fixed returns and priority in repayment during liquidation. However, they still carry some risk, such as the possibility of default if the company faces financial stress.
No, dividends are not guaranteed. They are paid only when the company earns sufficient profit and the board of directors decides to distribute them. Shareholders may go without dividends in lean financial years.
Interest earned from debentures is taxed as income under the head "Income from Other Sources" and is taxed according to the individual’s applicable income slab. Dividend income may be tax-exempt up to a specified limit, but beyond that, it is taxable based on prevailing income tax rules.
