TAMIL NADU NATIONAL LAW UNIVERSITY

TIRUCHIRAPPALLI

CORPORATE ACCOUNTING –PROJECT

REDEMPTION OF DEBENTURES

Submitted by: ALLEN FRANCIS, BC0170056

AMAL A R, BC0170057
BASIL SHIBU, BC0170013
Submitted to: Mr. P.Kumaranesan
Submitted on: 15th October, 2019

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 REDEMPTION OF DEBENTURES
INTRODUCTION

A debenture is basically a Latin word which literally means to debate. It is a written instrument
as debt which the companies raise when they are planning to raise their capital without diluting
equity shares. It also contains provisions regarding the repayment of principle and interest.
Section 71(1) of the Companies Act 2013, says that the companies may issue shares with an
intention to convert it into shares wholly or partially at the time of redemption. It is basically a
written statement of debt, acknowledging it as a debt and contains provisions regarding the
repayment of principle amount and interest. Section 71(1) which is mentioned above should be
approved by a special resolution passed at a duly convened general meeting.

REDEMPTION OF DEBENTURES

Redemption of debentures refers to extinguishing or discharging the liability on account of

debentures in accordance with the terms of issue. In other words redemption of debentures
means repayment of the amount of debentures by the company. There are four ways by which
the debentures can be redeemed. These are:

 Payment in lump sum

 Payment in installments
 Purchase in the open market
 By conversion into shares or new debentures

Payment in lump sum: The Company redeems the debentures by paying the amount in lump
sum to the debenture holders at the maturity thereof as per terms of issue1

Payment in installments: Under this method, normally redemption of debentures is made in

installments on the specified date during the tenure of the debentures. The total amount of
debenture liability is divided by the number of years. It is to note that the actual debentures
redeemable are identified by means of drawing the requisite number of lots out of the debentures
outstanding for payment.

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http://www.yourarticlelibrary.com/accounting/debentures/redemption-of-debentures-in-lump-sumaccounting-
entries/46945

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Purchase in open market: When a company purchases its own debentures for the purposes of
cancellation, such an act of purchasing and cancelling the debentures constitutes redemption of
debentures by purchase in the open market.

Conversion into shares or new debentures: A company can redeem its debentures by
converting them into shares or new class of debentures. If debenture holders find that the offer is
beneficial to them, they can exercise their right of converting their debentures into shares or new
class of debentures. These new shares or debentures can be issued at par, at a discount or at a
premium. It should be noted that only the actual proceeds of debentures are to be taken into
account for ascertaining the number of shares to be issued in lieu of the debentures to be
converted. If debentures were originally issued at discount, the actual amount realised from them
at the time of issue would be used as the basis for computing the actual number of shares to be
issued. It may be noted that this method is applicable only to convertible debentures2

SEBI’S GUIDELINES

Securities and Exchange Board of India (SEBI) has issued guidelines for redemption of
debentures. The salient points of these guidelines are:

 Every company shall create Debenture Redemption Reserve in case of issue of

debenture redeemable after a period of more than 18 months from the date of issue.
 The creation of Debenture Redemption Reserve is obligatory only for non-convertible
debentures and non-convertible portion of partly convertible debentures.
 A company shall create Debenture Redemption Reserve equivalent to at least 50% of the
amount of debenture issue before starting the redemption of debenture.
 Withdrawal from Debenture Redemption Reserve is permissible only after 10% of the
debenture liability has already been reduced by the company.

SEBI guidelines would not apply under the following situations:

 Infrastructure company (a company wholly engaged in the business of developing,

maintaining and operating infrastructure facilities); and
 A company issuing debentures with a maturity period of not more than 18 months

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http://download.nos.org/srsec320newE/320EL26.pdf, accessed on: 26/5/2018

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When a company gets loan, company issues debentures. Company gets this loan through
debentures for a fixed time. After that fixed time, company will return the money of debentures
to debenture holders. The refund of money to debenture holders is called redemption of
debentures. Following are the various methods of redemption of debentures giving accounting
treatment.

METHODS FOR REDEMPTION OF DEBENTURES

I. REDEMPTION OUT OF PROFITABILITY

In this method, we repay the money of debentures out of profit. Following entry will be passed:

 Transfer of Profit to debenture redemption reserve account

 Redemption of Debentures
II. REDEMPTION OUT OF CAPITAL

It means we directly repay the debentures out of capital. We just pass following entry after repay
of debentures by cheque. This entry's effect on our capital and it will reduce by same amount.
There is no need to transfer of profit to redemption reserves in this method.

III. REDEMPTION BY CONVERSION

A company may opt to not pay the debenture holders at the time of redemption. Instead of that, it can
convert the debentures into a new class of debentures or even equity shares. Such debentures are
known as convertible debentures. Such new debentures or shares can be issued at par, premium or
even discount. Let us see the accounting treatment for these scenarios.

 Old Debentures account Dr

 New Debentures account Cr
 Or Equity Share capital account Cr.

IV. REDEMPTION BY BUYING OWN DEBENTURES

In this method, directors go to debenture market and for redemption of debentures, they have
bought own debentures. For this, following entry will be passed. Own Debenture or investment
in own debentures account Dr. Bank account Cr. Investment in own debentures account or

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simply own debentures account will be shown on the assets side of the balance sheet. Debentures
will continue to be shown on the liabilities side of the balance sheet. Here, it is assumed that the
debentures are purchased immediately after the payment of interest.

V. REDEMPTION BY MAKING PROVISION

In this method, we create provision for redemption of debentures when we issue debentures. To
making provision for redemption is good method to repay the amount of debenture on the time.
We keep a small amount of provision and invest in good scheme. At the time of redemption, we
liquidate our provision and repay the amount of debentures, it has two sub-methods3

DEBENTURE REDEMPTION RESERVE

A Debenture issuing Company is required to create a Debenture Redemption Reserve Account

out of the earnings available for the distribution of the dividend and the amounts credited to that
Debenture Account may not be used by the Corporation, except for the redemption of
Debentures. Such an arrangement would ensure that the Company has sufficient liquidity to
redeem the debentures as they become due.
An appropriate amount is transferred each year to the Debenture Redemption Reserve and its
investment is called the Debenture Redemption Reserve. During the last year or upon the
redemption of the Debentures, reserve investments with redemption of Debentures are cashed
and the amount so obtained is used to redeem Debentures.

LIABILTY OF THE COMPANY TO CREATE A DEBENTURE REDEMPTION

RESERVE ACCOUNT

Section 71 of the Companies Act 2013 provides for the obligation to create a redemption reserve
account for debentures. Article 71 states the following:

(1) Where a corporation issues debentures under this section, it should create a debenture
redemption reserve account out of its profits, which are available for dividend distribution each
year until such debentures are repaid. .

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http://www.yourarticlelibrary.com/accounting/debentures/redemption-of-debentures-sources-
andmethods/57164

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(2) The amounts credited to the Debenture Redemption Reserve should not be used by the
Company for any purpose except for the purposes described above.

(3) The Company should pay interest and repay the debentures in accordance with the terms of
issue.

(4) If a corporation fails to repay the debentures on the maturity date or to pay the interest on the
debentures when due, the Court may, at the request of all or any of the debenture holders or the
debenture trustee and after hearing the parties involved, directs the corporation to immediately
repay the debentures by paying the principal and interest due to them.

SINKING FUND FOR REDEMPTION METHOD

Sufficient funds are required to redeem debentures at the end of a specified period. To meet this
requirement, the company may decide to create a sinking fund and invest adequate amount in
marketable securities or bonds of other business entities. Normally, a company ensures that an
equal amount is set aside every year to arrange the necessary funds at the time of redemption.
This is called Sinking Fund method according to which the company makes necessary
arrangements is sets aside a part of divisible profit every year and invests the same outside the
business in marketable securities. An appropriate amount is calculated by referring to on Sinking
Fund Table depending upon the rate of return on investments and the number of years for which
investments are made. The amount thus ascertained is transferred from profits every year to
Debenture Redemption Fund and its investment is termed as Debenture Redemption Fund
Investment. These investment earn certain amount of income (call it interest) which is reinvested
together with the fixed appropriated amount for the purpose in subsequent years In last year, the
interest earned and the appropriated fixed amount are not invested. In fact, at this stage the
Debenture Redemption Fund Investments are encashed and the amount so obtained is used for
the redemption of debentures. Any profit or loss made on the encashment of Debenture
Redemption Fund investments is also transferred to Debenture Redemption Fund Account. The
creation of Debenture Redemption Fund Account serves the purpose of Debenture Redemption
Reserve as required by law and the SEBI guidelines, and is, after redemption is transferred to
general reserve.

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INVESTMENT OF DEBENTURE REDEMPTION RESERVE AMOUNT

In addition, pursuant to Rule 18 (7) of the Companies (Share Capital and Debentures)
Regulations 2014, any corporation required to create a DRR must, by April 30 of each year,
deposit or invest, as the amount of its debentures maturing in the year ending March 31 of next
year, :
(a) in deposits with a registered bank, without charge or lien;
(b) unencumbered securities of the central government or a state government;
(c) in unencumbered securities referred to in paragraphs (a) to (d) and (e) of section 20 of the
Indian Trusts Act, 1882;
(d) in unencumbered bonds issued by another company that is notified under section 20 (f) of the
Indian Trusts Act, 1882.
The amount deposited or invested, as the case may be, above shall not be used for any purpose
other than the repayment of debentures maturing in the year mentioned above.
To the extent that the amount remaining deposited or invested, as the case may be, must never be
less than 15% of the amount of debentures maturing on March 31 of that year.
In the case of partially convertible debentures, a DRR must be created for the non-convertible
portion of the issue of debentures in accordance with this sub-rule.
The amount credited to DRR must not be used by the Company, except for repayment of
debentures.

CASE STUDY
BEE Co Ltd is a company registered under Companies Act 2013, manufacturing shoes. It is a
well functioning firm with lots of employees and also shareholders inside and outside the
company. The Balance Sheet of the company as on 31st March 2010 is been given below.
The Summarized Balance Sheet of BEE Co. Ltd. as on 31st March, 2010 is as under:

Liabilities Rupee Assets Rupee

Share Capital : Freehold property 1,15,000

Authorised : Stock 1,35,000

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30,000 Equity Shares of `10 each Issued and 3,00,000 Trade receivables 75,000
Subscribed

20,000 Equity Shares of `10 each fully paid 2,00,000 Cash 30,000

Profit and Loss Account 1,20,000 Balance at Bank 2,00,000

12% Debentures 1,20,000

Trade payables 1,15,000

5,55,000 5,55,000

At the Annual General Meeting, it was resolved:

(a) To give existing shareholders the option to purchase one ` 10 share at ` 15 for every four
shares (held prior to the bonus distribution), this option being taken up by all shareholders.
(b) To issue one bonus share for every five shares held.
(c) To repay the debentures at a premium of 3%.
The necessary journal entries and the company’s Balance Sheet after these transactions are
completed are given below:
JOURNAL

Bank A/c Dr. 75,000 75,000

To Equity Shareholders A/c 75,000

(Application money received on 5,000 shares @

Rs.15 per share to be issued as rights shares in the ratio of 1:4)

Equity Shareholders A/c Dr. 75,000

To Equity Share Capital A/c 50,000

To Securities Premium A/c 25,000

(Share application money on 5,000 shares @ Rs. 10 per share transferred

to Share Capital Account, and Rs. 5 per share to Securities Premium
Account vide Board’s Resolution)

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Securities Premium A/c Dr. 25,000

Profit & Loss A/c Dr. 25,000

To Bonus to Shareholders A/c 50,000

(Amount transferred for issue of bonus shares to

existing shareholders in the ratio of 1:5 vide
General Body’s resolution)

Bonus to Shareholders A/c Dr. 50,000

To Equity Share Capital A/c 50,000

(Issue of bonus shares in the ratio of 1 for 5 vide Board’s resolution)

Profit and Loss A/c 30,000

To Debenture Redemption Reserve 30,000

(for DRR created 25% x 1,20,000)

12% Debentures A/c 1,20,000

Premium Payable on Redemption A/c @ 3% 3,600

To Debenture holders A/c 1,23,600

(Amount payable to debentures holders)

Profit and loss A/c 3,600

3,600
To Premium Payable on Redemption A/c

(Premium payable on redemption charged to Profit & Loss A/c)

Debenture Redemption Reserve A/c 30,000

To General Reserve 30,000

(for DRR transferred to general reserve)

Debenture holders A/c Dr. 1,23,600

To Bank A/c 1,23,600

(Amount paid to debenture holders on redemption)

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 Balance Sheet of BEE Co. Ltd. As on 31st March 2011 (After completion of transactions)

Particulars Note no. Amount

I. Equity and liabilities

(1) Shareholder's Funds

(a) Share Capital 1. 3,00,000

(b) Reserves and Surplus 2. 91,400

(2) Current Liabilities

(a) Trade payables 1,15,000

Total 5,06,400

II. Assets

(1) Non-current assets

(a) Property, Plant and Equipment

(i) Tangible Assets 3. 1,15,000

(2) Current assets

(a) Inventories 1,35,000

(b) Trade receivables 75,000
(c) Cash and bank balances 4. 1,81,400
Total 5,06,400

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Notes to Account:

1. Share Capital 3,00,000

30,000 shares of ` 10 each fully paid (5,000
shares of ` 10 each, fully paid issued as bonus
shares out of securities premium and P&L
Account)

2. Reserve and Surplus

Profit & Loss Account 1,20,000
Less: Premium on redemption of debenture (3,600)
Less: Utilisation for issue of bonus shares (25,000)
Less: DRR created (30,000)
General Reserve 61,400
30,000 91400
Tangible assets
3.
Freehold property
1,15,000
Cash and bank balances
4.
Cash at bank (2,00,000 + 75,000 – 1,23,600)
1,51,400
Cash in hand
30,000 1,81,400

Conclusion

Redemption of Debentures is basically the process of the repayment of the principle amount and
interest received for the issued debentures. Companies do tend to convert the debentures into
shares wholly or partially at the time of redemption of debentures. The requirement for the
creation of Debenture Redemption Reserve and making investments for the purpose of making
debentures is one of the key procedures under the redemption of debentures. Various methods of
debentures allow the seller to choose a market according to their conditions. Issuing debentures
is recognized as one of the important source of earning or raising capital during the need of
raising it. It is a less risky way of raising capital compared to that of shares. The balance figure in
the Debenture Reserve Account of the firm indicates that firms working conditions and
profitability.

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