Preference shares Vs Debentures

ISURU · 1 Preference shares Vs Debentures Tue Jun 21, 2011 11:50 pm

ISURU

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As per the last prathilaba program, there are no preference shares in the current market?
But there are debentures.
Is there a that much of a different between debentures and preference shares?

nkalansu · 2 Re: Preference shares Vs Debentures Wed Jun 22, 2011 12:07 am

nkalansu

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ISURU wrote:As per the last prathilaba program, there are no preference shares in the current market?
But there are debentures.
Is there a that much of a different between debentures and preference shares?

Big difference

Debenture appears as long term debt in the balance sheet of a company. Debentures have a fixed/floating interest rate and the company has to pay this to the debenture holders as per the terms and conditions agreed. And if the company goes bust then the company has to pay the debenture holders first before the preference shareholders and ordinary shareholders.

Preference shares is equity. it is not debt. However it has a fixed interest rate that the company has to pay to the preference shareholders. If the company goes bust then there is no requirement to pay the preference shareholders. However if enough assets are there then company has to pay the preference shareholders first before ordinary shareholders.

Last edited by nkalansu on Wed Jun 22, 2011 12:09 am; edited 1 time in total (Reason for editing : additional information)

sapumal · 3 Re: Preference shares Vs Debentures Wed Jun 22, 2011 6:03 pm

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How about the liquidity of Debentures ?

nkalansu · 4 Re: Preference shares Vs Debentures Wed Jun 22, 2011 7:30 pm

nkalansu

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sapumal wrote:How about the liquidity of Debentures ?

Good question. It depends on the demand and supply and characteristics of the debenture. For a simple example say that you have 100,000 shares of stock X and the price of that stock is Rs. 5,000/= per share. Then it is pretty hard to find a buyer to dispose those shares quickly. Similarly there are certain criteria which determine the liquidity of debenture.

If the debenture interest rate is much lower than the prevailing interest rates then it is pretty difficult to find a buyer.

Also there are two types of debentures. 1. redeemable debentures (company will give the money back to the people invested after the stipulated period of time) 2. irredeemable debentures. (Company will not give the money back. Its like ordinary shares. Companies will not give money back for ordinary shares unless there is a share repurchase.). So investor preference will determine the liquidity here.

So there are other so many characteristics that determine the liquidity of debentures.

This is a simple explanation. Experts please add your valuable insights.