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Redemption of Debentures

The document discusses redemption of debentures including the meaning, journal entries, time of redemption, amount of redemption, debenture redemption reserve, conditions of investing 15% of debentures maturing during the year, methods of redemption including lump sum payment, redemption by draw of lots, purchase of own debentures, and conversion into shares.

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chithralega
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13 views

Redemption of Debentures

The document discusses redemption of debentures including the meaning, journal entries, time of redemption, amount of redemption, debenture redemption reserve, conditions of investing 15% of debentures maturing during the year, methods of redemption including lump sum payment, redemption by draw of lots, purchase of own debentures, and conversion into shares.

Uploaded by

chithralega
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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REDEMPTION OF DEBENTURES

• MEANING
Redemption of Debentures means repayment of the amount of
debentures to the debenture holders.
It implies of the principle amount as well as interest due on
debentures to the debenture holders.
In other words, it refers to the discharge of liability on debentures
in accordance with the terms of issue.
Journal entries at the time of redemption of debentures:
Redemption of Debentures at Par
(a) Debentures A/C Dr
To Debentureholders’ A/C
(Being debentures due for redemption)
(b) Debentureholders’A/C Dr
To Bank A/C
(Being amount paid on redemption)
Redemption of Debentures at Premium
(a) Debentures A/C Dr
Premium on Redemption of Debentures A/C Dr
To Debentureholders’A/C
(Being debentures due for redemption at premium)
(b) Debentureholders’A/C Dr
To Bank A/C
(Being amount paid on redemption)
TIME OF REDEMPTION
Debentures are normally redeemed at the expiry of their
time period by making payments to the
debentureholders
as per term of issue.
AMOUNT OF REDEMPTION
The amount to be paid on redemption of debentures
depends upon the terms and conditions as stated in
debenture certificate.
Debenture Redemption Reserve (DRR)
According to section 71(4) of the Companies Act 2013
and the
Securities and Exchange Board of India (SEBI) guidelines
requiring creation of Debenture Redemption Reserve
equivalent
to at least 25% of the amount of debentures issued
before
redemption commences, it is not possible to redeem
debentures
purely out of capital.
Hence, a Company cannot redeem its debentures purely
out of
capital. At least 25% of debentures issued must be
redeemed out
of profits by creating a “Debentures Redemption
Reserve” and
the balance of debentures issued may be redeemed out
of profits or out of capital.
Conditions of Investing 15% of
Debentures maturing during the year:

• As per Rule 18 (7) (C) of the Companies Rules 2014,


• every company required to create DRR shall before
• the 30th day of April of each year, deposit or invest, a
• sum which shall not be less than 15% of the amount
of its debentures to be redeemed during the year
• ending on the 31st March of the next year.
Journal entries:

• For transfer of profit to Debenture Redemption Reserve


• Surplus, i.e. , Balance in Statement of Profit and Loss Dr
• To Debenture Redemption Reserve A/C
• (Being profit equal to 25% of debentures transferred to DRR)
• (ii) For making investment or deposit in specified securities
• Debenture Redemption Investment A/C Dr
• To Bank A/C
• (Being investment equal to 15% of debentures made in specified securities)
• (iii) At the time of redemption for encashment of Investment
• Bank A/C Dr
• To Debenture Redemption Investment A/C
• (Being investment encashed consequent upon redemption of debentures)
• (iv) When all Debentures are redeemed
• Debenture Redemption Reserve A/C Dr
• To General Reserve A/C
• (Being DRR transferred to General Reserve)
METHODS OF REDEMPTION OF
DEBENTURES

• . Lump sum payment at the end of fixed period


• 2. Redemption of Debentures in instalments (By draw of lots)
• By Purchase of own debentures in the open market
• 4. By conversion into shares
LUMP SUM PAYMENT AT END OF
FIXED PERIOD

• Under this method, the total amount of debentures is


• paid to the debentureholders as a single complete sum
• of money at the expiry of a specified period i. e. , at
• maturity of the debentures.
REDEMPTION BY DRAW OF
LOTS

• Under this method, the company while issuing


• debentures mentions that its debentures will be
• redeemed annually in a certain proportion, through
• the selection by the draw of lots.
• The holders of the selected debentures are then
• repaid the amount at par or at a premium according
• to the terms of issue
BY PURCHASE OF OWN
DEBENTURES IN THE OPEN
MARKET

• A company, if authorised by its Articles of Association, can


• redeem its own debentures in full or in part by purchasing
• them from the stock market for cancellation.
• Debentures can be purchased at par or at premium.
• Generally, a company redeem its debentures by purchasing in
• the open market when the interest rate of debentures is higher
than the market interest rate.
BY CONVERSION INTO
SHARES

• Under this method, debentureholders are given the right to


• exercise the option to convert their debentures into shares
• or new class of debentures.
• But this option is to be exercised at a stipulated date within
• a specified period but before the actual date of redemption
Profit Prior to Incorporation

• "Profit prior to incorporation" is the profit earned


• or loss suffered during the period before
• incorporation. It is a capital profit and is not legally
• available for distribution as dividend because a
• company cannot earn a profit before it comes into
• existence. Profit earned after incorporation is
• revenue profit, which is available for dividend
Pre-Incorporation and Post Incorporation
period

• Pre-Incorporation and Post Incorporation period: The period before


incorporation and the period after incorporation is called as pre
incorporation and post incorporation period.
Example For Pre-incorporationAnd
Post Incorporation Period

Eg1: X ltd was formed on 1.4.2012 to take over the


business of Y ltd from 1.1.2012. The year ended on
31/3/2012. Calculate the pre and post incorporation
period.
Business was taken over from 1.1.2012
• Incorporated on 1.4.2012
• Therefore pre incorporation period = Jan + Feb + March
• = 3 months (i,e. period between the business taken over and
incorporated) • Post incorporation period = April to Dec = 9 months.
STEPS TO DETERMINE PREINCORPORATION
PROFIT/LOSS:

• Prepare a Trading a/c for the whole period.


• Calculate Time Ratio and Sales Ratio.
• Time Ratio can be calculated by taking preincorporation and post-
incorporation time.
• From the eg1: pre-incorporation period is 3 months
• Post-incorporation period is 9
• months Therefore Time Ratio = 3:9 or 1:3
• Sales Ratio can be calculated on the sales taken place
• during pre and post incorporation period.
Eg2)

• M Company was incorporated on 1.6.2012 and


• acquired a business with effect from 1/4/2012. Total
• sales from 1/4/12 up to 31/3/13 were Rs.450000.
• Sales for April and May were double the average
• sales. Sales from June to September= ¼ of the average monthly
sales, sales from November to February = the average monthly
sales and the sales in March is Double the average sales.
Sol: Average monthly sales = 450000/12 = 37500 (total sales/12months)
• Now calculate sales from April toMarch
April – 37500 x 2 = 75000 • May – 37500 x 2 = 75000
June- 37500 x ¼ = 9375 • July- 37500 x ¼ = 9375 • Aug- 37500 x ¼ = 9375
Sep- 37500 x ¼ = 9375
Oct- 37500 = 37500 (because it is equal to average sales)
Nov- 37500 = 37500
Dec- 37500 =37500
Jan- 37500 = 37500
Feb- 37500= 37500
Mar- 37500 x 2 = 75000
Pre-incorporation sales : Post –incorporation sales • 150000 : 300000 • 1 : 2
Therefore Sales Ratio = 1:2
And Last Step Is :-

• Prepare a net profit statement to analyze pre and post


incorporation period
Points to be noted while preparing net
profit statement

• Gross profit to be calculated on sales ratio.


• Divide all standing expenses or fixed expenses on
time basis. E.g., Salaries, rent, printing & stationery
telephone charges, postage & telegram, general expenses
depreciation, administration expenses, audit fees etc

• Divide all variable expenses on sales ratio e.g., carriage outwards,


advertisement, salesman salaries, commission, brokerage, bad
debts etc.,
• · Salary of partners, interest on purchase
• consideration, interest on vendor capital are to be charged to pre-
incorporation period( i.e. expenses incurred up to the date of
incorporation)
• Some expenses exclusively belong to post incorporation period and
they have to be charged for post incorporation e.g., managing
director’s salary, director’s fees, debenture interest, discount on
issue of shares, discount on issue of debenture, preliminary
expenses written off, underwriting commission written off etc.,
• · Audit fees can be divided for pre-incorporation
• period or post- incorporation period based on time
• ratio. Audit fees can also be charged exclusively
• for post incorporation period, assuming auditing
• is compulsory for the company)
• • · Bad debts recovered can be charged to both
• the period depending on where it relates to.
• • · Interest received can be charged for both the period based on sales
ratio.
UNDERWRITING OF
SHARES AND DEBENTURES
MEANING OF UNDERWRITING

Underwriters agree
to Individuals,
Contract between take whole or portion In consideration of partnership
company and of underwriting firms, joint stock
underwriters. shares or debentures commission. companies can become
floated but not underwriters.
subscribed by public
ISSUE IS FULLY UNDERWRITTEN WITHOUT FIRM
UNDERWRITING

• CASE 1: IF THE WHOLE ISSUE IS UNDERWRITTEN BY ONE UNDERWRITER


• • If the whole of the issue has been underwritten by one person, he is
• responsible to subscribe all the securities which have not been
subscribed
• by the public .
• • Determination of marked and unmarked applications becomes
• unnecessary.
• • Liability of underwriter= Shares or Deb offered – Total applications
(marked and unmarked) received
EXAMPLE
CASE 2: IF THE WHOLE ISSUE IS UNDERWRITTEN BY
A NUMBER OF UNDERWRITERS
DIVISION OF UNMARKED APPLICATIONS

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