DEBENTURES
CA.PARVEEN JINDAL
REDEMPTION OF DEBENTURES
METHODS FOR REDEMPTION OF DEBENTURES
By By Own By Sinking By
Conversion Debentures Fund Installment
Section 71 of Companies
Act 2013
Debenture Redemption Reserve
A company issuing debentures is required to create a
debenture redemption reserve account out of the proflts
available for distribution of dividend and amounts credited to
such account cannot be utilized by the company except for
redemption of debentures. Such an arrangement would ensure
that the company will have sufficient liquid funds for the
redemption of debentures at the time they shall fall due for
payment.
Rules for DRR
Adequacy of Debenture Redemption
Reserve (DRR)
For debentures issued by All India Financial
Institutions (AlFls) regulated by Reserve
(i) Bank of India and Banking Companies for No DRR is required
both public as well as privately placed
debentures.
For other Financial Institutions (FII) within DRR will be as applicable to NBFCS
(ii)
the meaning given in the Companies Act. registered with RBI.
25% of the value of debentures
For debentures issued by NBFCs registered issued through public issue.
(iii)
with the RBI. No DRR is required in the case of
privately placed debentures.
For debentures issued by other companies
25%of the value of
(iv) including manufacturing and infrastructure
public issue.
companies.
METHOD 1:REDEMPTION IN
INSTALMENTS
A company may redeem its Debentures in instalments as per the terms
of the issue of Debentures. The terms may be in any of the following
forms:
Redemption of a fixed sum of Debentures: The terms of issue may
provide that from a particular year the company will be redeeming
Debentures of a fixed amount. The decision about the Debentures
holders whose money has to be returned can be taken either by (i)
lottery method or (ii) serial number of Debentures.
METHOD 2: OPEN MARKET
OPEN MARKET
OWN DEB. FOR OWN DEB. AS AN
CANCELLATION INVESTMENT
OWN DEB. FOR CANCELLATION
If the Debentures are purchased for redemption, it
is always presumed that they are to be immediately cancelled.
The Debentures account, should, therefore, be debited to the
interest account and any profit or loss on redemption of
Debentures should be credited or debited to the “CAPITAL
RESERVE ACCOUNT”.
OWN DEB AS AN INVESTMENT
It is not necessary for the company to cancel immediately the
Debentures purchased by it. It may like to hold its own
Debentures as investment for such period as it may deem fit.
Any amount paid for purchase of such Debentures should be
debited to “investment in own Debentures account” or simply
“own Debentures account”. No profit or loss should be
recorded at the stage when the Debentures are purchased as
investment. However, such profit or loss should be recorded in
the books of the company when such Debentures are cancelled
or disposed off.
Interest on Debentures will be debited to Profit and Loss
account while interest on own debentures will be credited to
profit and loss a/c.
METHOD 3: SINKING FUND
SINKING FUND
SINKING FUND SINKING FUND
INVESTMENT INSURANCE POLICY
S.F.INVESTMENT METHOD
In case of sinking fund method, every year a fixed amount is
taken from the Profit and Loss appropriation account. This
amount is invested outside the business in certain good
securities. When the time for redemption of Debentures
comes, securities are realized and the sale proceeds are used
for redeeming Debentures. The sinking fund can also of two
types:
Cumulative sinking fund: In case of this fund, the amount
received as interest on securities of sinking fund is also
reinvested. Thus, the company earns compound interest.
Non cumulative sinking fund: In case of this fund, the amount
received as interest on securities is not reinvested but taken
as a revenue profit of the business.
INSURANCE POLICY METHOD
The company may take an insurance policy for redemption of
Debentures in place of purchasing investments. The policy will
be taken for a period which will enable the company to get the
required money on the required date. The amount of premium
will have to be paid in the beginning of the year. The question
of getting interest does not arise at all and therefore there
will be no entry for interest.
METHOD 4: CONERSION
CONVERSION
ON DUE DATE BEFORE DUE DATE
BASIC CONCEPT OF CONVERSION
The terms of issue may give an option to the Debentures
holders to get their existing Debentures converted into
shares or new Debentures. Even if the terms of issue do not
provide, the company can also give such an option to its
Debentures holders. In case, the Debentures holders exercise
their option, the journal entry will be as follows:
Debentures (old) A/c Dr.
To Debentures (new)/ or share capital a/c
The conversion of Debentures is to be made as per terms of
issue of Debentures.
CONVERSION ON DUE DATE
In such a case conversion of Debentures into shares may be
made on the basis of terms and conditions mutually agreed
upon by the concerned parties i.e., the company and the
Debentures holder for redemption either at the time of issue
or at the time of redemption.
In such a case even Debentures originally issued
at a discount can be converted into shares on the
basis of their nominal value
CONVERSION BEFORE DUE
DATE
Conversion of Debentures into shares in such a case must not
be such as to amount to an unauthorized issue of shares at a
discount.
For example if a Debentures of Rs.100 is issued at 10%
discount and later on converted into a share of Rs.100, it
virtually amounts to issue of shares at discount.
Of course, there is nothing to prevent the company from
converting such Debentures taking its nominal value as Rs.90.
In other words where the Debentures are originally issued at
discount, the actual amount realized on account of them
should be considered while determining the number of shares
to be issued.
MASTER QUESTIONS ON
DEB.
15,18,21,22,24,27,28,
30,31,33,37,39
DO IT & LIVE HAPPY
