In corporate finance, what is the main difference between a debenture and a preference share issued by a company?

Introduction / Context:
Debentures and preference shares are two different sources of long term finance for companies. Interviews often test whether candidates understand how these instruments differ in terms of ownership, risk, return and position in the capital structure.

Given Data / Assumptions:
- Both debentures and preference shares are issued by companies to raise funds from investors.
- Debentures are typically treated as debt, while preference shares are a special category within equity capital.
- The question focuses on their fundamental characteristics, not on detailed legal variations in different jurisdictions.

Concept / Approach:
A debenture is a long term debt instrument. Investors who buy debentures are creditors of the company and usually receive fixed interest, which is a contractual obligation. They do not gain ownership rights or voting rights in the way equity shareholders do. Preference shares are part of share capital. Holders are owners with limited or no voting rights, but they have preferential rights to receive dividends at a fixed rate before ordinary shareholders and to receive capital repayment before ordinary shareholders in the event of liquidation.

Step-by-Step Solution:
Step 1: Classify debentures as debt, representing borrowing by the company, usually with fixed interest and a redemption schedule.
Step 2: Classify preference shares as equity instruments that form part of the company's share capital, with preferential but not absolute rights.
Step 3: Highlight that debenture holders are creditors, while preference shareholders are owners, though with limited control.
Step 4: Select the option that correctly captures these distinctions.

Verification / Alternative check:
In financial statements, interest on debentures appears as a finance cost that reduces profit before tax, while preference dividends are usually appropriations of profit after tax. Also, debentures are shown under liabilities, whereas preference share capital is shown within equity. This classification supports the conceptual difference between the two instruments.

Why Other Options Are Wrong:
Option A reverses the nature of the instruments and is incorrect. Option C claims they are identical ordinary equity, which ignores the debt nature of debentures and the preferential but limited features of preference shares. Option D over generalises by stating that debentures are always secured and that preference shares are unsecured loans; in practice debentures can be secured or unsecured, and preference shares are not loans but part of equity capital.

Common Pitfalls:
Some learners think preference shares are a form of debt because they often pay fixed dividends, but the legal and accounting treatment is different from interest bearing loans. Others assume that debentures automatically carry voting rights because they are long term instruments, but creditors do not normally vote on company decisions in the same way as shareholders. Remembering who is a creditor and who is an owner is a simple way to keep the distinction clear.

Final Answer:
Correct option: A debenture is a long term debt instrument paying fixed interest without ownership rights, while a preference share is part of share capital with preferential rights to dividends and capital repayment.