Distinguish Between Owned Capital and Borrowed Capital | 12th HSC Secretarial Practice (S.P.) Chapter 2
The distinction between Owned Capital and Borrowed Capital is a core question from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 2: Sources of Corporate Finance. In the HSC Board Examination, this question is frequently asked under Question 4 (Distinguish Between) carrying 4 Marks. Below is the complete, textbook-accurate tabular solution strictly aligned with the latest Balbharati Textbook and official board marking scheme.
Board Exam Marking Scheme Tip: Each Distinguish Between question in Q.4 carries 4 Marks (1 mark per valid point). Always present your answer in a neat 3-column table including the Basis of Distinction. Write at least 5 to 6 clear points (starting with Meaning, Sources, Return on Investment, and Status) to guarantee a full 4 out of 4 score!
Distinguish Between: Owned Capital and Borrowed Capital
| Sr. No. | Basis of Distinction | Owned Capital | Borrowed Capital |
|---|---|---|---|
| 1. | Meaning | It is that capital which is contributed by the shareholders (owners) of the company. It also includes internal accruals (retained earnings). | It is that capital which is borrowed from creditors (external lenders). It is also known as Debt Capital or Loan Capital. |
| 2. | Sources | This capital is collected by the issue of Equity Shares and Preference Shares, as well as through Retained Earnings (free reserves and surplus). | It is collected by way of issue of Debentures, Bonds, Fixed Deposits (Public Deposits), and Loans from banks and financial institutions. |
| 3. | Return on Investment | The shareholders get Dividend as income on their investment. The rate of dividend is fluctuating in the case of equity shares, but fixed in the case of preference shares. | The debt capital holders get Interest as income on their investment. Interest is paid at a fixed rate regardless of whether the company makes a profit or not. |
| 4. | Status of Investors | The shareholders are the owners of the company. | The debt holders are the creditors of the company. |
| 5. | Voting Rights | The equity shareholders enjoy normal voting rights at the general meeting and participate in the management of the company. | The creditors (debenture holders, depositors, etc.) do not enjoy voting rights at the general meeting. |
| 6. | Repayment of Capital | The shareholders do not enjoy priority over creditors. They are eligible for repayment of capital only after making payment to all creditors at the time of winding up of the company. | The creditors get priority over the shareholders in case of return of the principal amount at the time of winding up of the company. |
| 7. | Charge on Assets | The shareholders do not have any charge (security) on the assets of the company. | The secured debenture holders and institutional lenders have a fixed or floating charge on the assets of the company. |
| 8. | Nature of Capital | Owned capital is permanent capital which remains in the business throughout the lifetime of the company. | Borrowed capital is temporary capital which must be repaid after a specific, pre-determined period. |
Quick Memory Trick to Remember All Points in the Exam
Memory Shortcut (Mnemonic — "MSR-SVR-CN"):
Notice how similar this answer is to Shares vs. Debentures! Just remember these 6 headings:
1. Meaning (Contributed by Shareholders vs. Borrowed from Creditors)
2. Sources (Equity/Preference Shares & Retained Earnings vs. Debentures, Deposits & Loans)
3. Return on Investment (Dividend vs. Fixed Rate of Interest)
4. Status of Investors (Owners of the Company vs. Creditors of the Company)
5. Voting Rights (Enjoy Normal Voting Rights vs. No Voting Rights)
6. Charge on Assets (No Charge on Assets vs. Charge Created on Assets)
Key Concept Summary for Objective Questions (Q.1)
- Two Main Sources of Finance: Corporate finance is broadly classified into two categories based on ownership: (1) Owned Capital and (2) Borrowed Capital.
- Internal Source of Owned Capital: Retained Earnings (also known as "Ploughing Back of Profits" or "Self-Financing") is an internal source of owned capital because it represents undistributed profits reinvested into the business.
- Tax Benefit on Borrowed Capital: Interest paid on Borrowed Capital is treated as a business expense and is deductible for income tax purposes, whereas dividend paid on Owned Capital is an appropriation of profit and is not tax-deductible.