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Differences between Debentures and preference share capital?
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Answer Posted / kazasreeramprasad
It resembles equity in that: a) Preference dividend is
payable out of distribution of profits. It is not a tax
deductible payment, b) Preference dividend is not
obligatory payment, (in the sense that the payment of
preference dividend is entirely within the discretion of
the directors, though it can be accumulated.)
Preference capital is similar to debentures in several
ways: a)the dividend rate on preference dividend is usually
fixed, b) the claim of preference shareholders is prior to
the claim of equity shareholders, and c) preference
shareholders do not normally enjoy the rights to vote.
Preference capital has a prior claim/preference over equity
capital both on the income and assets of the company.
Preference dividend is cumulative in the sense that all
unpaid dividends are carried forward and payable before the
ordinary dividend is paid
Preference capital has a limited life after which it must
be retired.
Preference dividend is fixed and is expressed as a
percentage of par value. Non payment of dividend will not
force bankruptcy on the company
Preference capital may sometimes be converted (fully or
partly) into equity shares or debentures at a certain ratio
during a specified period.
Preference share capital ordinarily does not carry voting
rights. It is however, entitled to vote on every resolution
if:
(a) the preference dividend is in arrears for more than 2
years in respect of cumulative preference shares,
(b) the preference dividend has not been paid for a period
of two/more consecutive years or an aggregate period of
three/more years in the preceding six years ending with the
expiry of the immediately preceding financial year.
Debentures are instruments for raising long term debt
capital. Debenture holders are the creditors of the
company. The obligations of the company towards its
Debenture holders are similar to that of a borrower who
promises to pay interest and capital at specified times
When a debenture issue is sold to the investing public, a
trustee is appointed through a deed
A company may issue debentures which are convertible into
equity shares at the option of the Debenture holders.
Often debentures are secured by a charge on the immovable
properties both present and future, of the company by way
of an equitable mortgage. (by deposit of title deeds)
The retirement of debentures involves a substantial
financial burden
Debenture issues sometimes carry a call provision
Debentures are usually redeemable
The interest payment on the debentures is a fixed
obligation, irrespective of the financial situation of the
issuing firm
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