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Corporate Accounting Redemption of Debentures

The document discusses the various methods of redeeming debentures. It explains that redemption refers to repaying debenture holders the amount owed. There are four main methods of redemption: payment in a lump sum, payment in installments, purchasing debentures in the open market, and converting debentures into shares or new debentures. It provides details on each of these redemption methods.

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Rajesh Ambrose
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1K views5 pages

Corporate Accounting Redemption of Debentures

The document discusses the various methods of redeeming debentures. It explains that redemption refers to repaying debenture holders the amount owed. There are four main methods of redemption: payment in a lump sum, payment in installments, purchasing debentures in the open market, and converting debentures into shares or new debentures. It provides details on each of these redemption methods.

Uploaded by

Rajesh Ambrose
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Explain the Various Methods of Redemptions of Debentures

What is Redemption of Debentures?


Redemption of debentures refers to payment of the amount of debentures by the
enterprise. When debentures are reclaimed, liability on account of debentures is
being discharged. To put it in other words, the amount of capital needed for
redemption of debentures is large and, hence, economic enterprises make adequate
provision out of gains and accrue capital to reclaim debentures.

Meaning of Redemption of Debentures


 It means repayment of the number of debentures to the debenture holders.
 Debentures can be redeemed either at par or at a premium.
 The terms and conditions of redemption are usually given in the prospectus
inviting applications for the issue of debentures.
There are 4 ways by which the debentures can be reclaimed. Namely :

1. Payment in lump sum


2. Payment in instalments
3. Purchase in the open market
4. By conversion into shares or new debentures

Methods of Redemption of Debentures:

 Payment in lump sum : The enterprise reclaims the debentures by paying


the fund in lump sum (round sum) to the debenture holders during the
maturity hereof as per the terms and conditions of issue.

1
Explain the Various Methods of Redemptions of Debentures

 Payment in instalments: Under this method, usually redemption of


debentures is paid in instalments on the particular date during the time in the
position of the debentures. The total amount of debenture liability is being
divided by the total number of years. This must be noted that the authentic
debentures reclaimable are recognised by the sources of drawing the
required number of lots out of the debentures outstanding for the payment.
 Purchase in open market: When an enterprise buys its own debentures for
the aim of cancellation, such an act of buying and cancelling the debentures
comprises redemption of debentures by purchase in the open marketplace.
 Conversion into shares or new debentures: An enterprise can reclaim its
debentures by transforming them into a new class of debentures or shares. If
debenture holders find that the proffer is useful to them, they can exercise
their right of transforming their debentures into new class of debentures or
shares. These new shares or debentures can be either circulated at a
premium, at a discount or at par. It may be noted that this method is
applicable only to convertible debentures.

2
Explain the Various Methods of Redemptions of Debentures

(1)  DRR is a reserve


Debenture created out of
Redemption profits for
Reserve redeeming
debentures.
According to
section 74(4) of
the Company’s
Act, 2013 and
Rule 18(7) of the
Companies
(Share Capital
and Debentures)
Rules, 2014, a
Company is
required to
transfer an
amount equal to
at least 25% of
the value of
debentures to the
Debenture
Redemption
Reserve a/c
before
redemption of
debentures.

(2)  As per Rule 18(7)


Investment of the Companies
in the (Share Capital
Specified and Debentures)
Securities: Rules, 2014, at
least 15% of the
nominal value of

3
Explain the Various Methods of Redemptions of Debentures

the debentures to
be redeemed
during the year
should be
invested on or
before 30th April
of the year in
which the
redemption is to
be made.

(3)  All India Financial


Exemption to Institutions
Create DRR: (AIFIs) regulated
by RBI
 Banking
Companies

(4)  Shown in the


Disclosure of Equity and
DRR: Liability part of
the Balance Sheet
under the head
‘Shareholders’
fund and sub-
head ‘Reserves
and Surplus’.

(5) Transfer  When all the


of DRR: debentures are
redeemed, DRR
Account is closed
by transferring
the amount to
General Reserve.

4
Explain the Various Methods of Redemptions of Debentures

(6) Sources The amount required for


of Finance redemption may be
for the arranged:
Redemption
of  From the
Debentures: proceeds of fresh
issue of shares or
debentures
 Out of capital that
is a redemption of
debentures
without the
utilization of any
profits of the
company. It is
possible only in
case of AIFIs and
Banking
companies as
these are
exempted from
creating DRR
 Out of profits: if a
company retains
a part of divisible
profits every year
and utilizes it for
the purpose of
redemption of
debentures.

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