Redemption of Debentures

Types of debn:
 On basis of security: -
1) Secured debn
2) Unsecured debn

 On basis of convertibility: -
1) Convertible debn
2) Non- convertible debn

 On basis of permanence: -
1) Redeemable debn
2) Irredeemable debn

 On basis of negotiability (transferability): -

1) Registered Debn
2) Bearer debn

 On basis of priority: -
1) First debn
2) Second debn

Features:
 Represents debt for the co.  liability for the co.
 Int payable @fixed rate and on fixed date.
 Int is a charge against profit  so payble if co has made
profit or not.
 No voting power {section 71(2)}
 Generally for issue of debn, approval of only BOD is
required except in the following two cases: -
1) For issue of convertible debn {section 71(1)}
2) When amt already borrowed plus to be borrowed
exceeds the paid up cap + free reserves + SP (section
180) then for any addn money we need approval of Sh
holders by special resolution. This rule is only
applicable for issue of debn and loan (if limit is
exceeded).

 If debn are secured , charge on asset is created (i.e. asset

is given as security to the debn holders) and it is
registered with ROC. Also , disclosure is to be made on
charge on asset created in notes to A/cs . IF
DEBENTURES ARE SECURED THEN MAX LIFE WILL BE
10YEARS EXCEPT IN CASE OF INFRASTRUCTURE PROJECT
WILL BE 30 YEARS.
 As per Secn 71 , when a co. issues debn : -
1) A co. is required to appoint a debn Trustee .
Debn Trustee: are a mediator between co. and the
debn holders and would take care of the rights of debn
holders.
2) A Co. issuing debn , must create debn Redemption
reserve a/c (DRR a/c) out of available profits.
This done to secure funds for redemption of debn.
These funds cannot be utilized for anything else other
than for redemption of debn.
 This ensures that the co, has sufficient liquid funds for
redemption of debn at the time when full amt is due.
3) Because of DRR , free reserves goes down leading to
less money for Dividend declared to sh holders. So
money is saved which can be used for redemption of
debn. if we want , this money saved can be made
untouchable by investing it ( DRRI a/c ) and such
investment can be sold during redemption of debn.
4) When due date of redemption of debn comes , the co.
sells the investment to repay debn holders.
Under 7(a)
i) Sell investment Cash a/c Dr.
To DRRI a/c
ii) Redemption of debn 12% debn a/c Dr
To cash A/c

5) After redemption of debn , bal of DRR a/c is trf to GR

a/c.
DRR a/c Dr
To GR a/c
 Present value for Creation of DRR
Companies issuing debn For privately For public issue
placed debn
All India financial institution NO DRR NO DRR
(AIFIs) regulated by RBI
(ex: EXIM, NABARD, SIDBI)
And banking co.( ex: ICICI, SBI,
Kotak )
Other Financial intitutns as NO DRR No DRR
defined by U/s 2(72) of CA
2013. (ex: LIC , IDFC)
Listed NBFC ( ex: Sriram No DRR No DRR
transport finance, Bajaj
finance ) and listed HFC (ex:
HDFC, LIC housing finance , L&T
housing finance)
Other Listed Co. (ex: Jubilant, No DRR No DRR
Tata Steel, Infosys, TCS)

Unlisted NBFC’s and unlisted No DRR 10% of the val

HFC of o/s debn
issued
Other Unlisted Co. 10% of val of 10% of val of o/s
o/s debn issued debn issued

Note:
 It is better to create DRR req immediately on allotment
of debn.
 If date of allotment is not given then it is crated at the
beginning of the year.
 If there are no Free reserves available then trf to DRR is
not required.

DRRI mandatory in the foll co.:

 All listed NBFCs
 All Listed HFCs
 All other listed co. ( other than AIFIs, Banking co., other
financial institutions ) ( DRRI not applicable to EXIM,
NABARD, SIDBI, ICICI, Kotak, LIC, IDFC)
 All Unlisted co. (other than Unlisted NBFC, unlisted HFC)

When to be invested: Shall on or before the 30th day of

April in each year ,in respect of debn issued , deposit or
investment.

How much to invest : 15% of amt of debn maturing

during the year ending on 31st day of march of next
year(i.e. including premium too)
Note:
 DRR must be created immediately after allotment of
debn
 DRRI should be done by 30th April i.e. first month of the
year in which debn redemption takes place.

 Int received on DRRI is either re- invested or trf to P/l

 All sums in ICAI book are solved on the assumption that
int on DRRI is not Re-invested, so it is trf to P/l a/c

 Profit or loss on sale of DDRI a/c is transferred to DRR

a/c not P/l a/c.

Issue of debn :
 Can be issued at par, premium (profit for us), discount
(loss for us)
 Disc on issue of debn is a loss for us so it must be w/o by
using Security Premium a/c or P/l a/c over the life of
debn in ratio of NV of debn o/s during the year.
 When debn is redeemed at premium then PROD is a loss
for the co. so it is to be w/o using SP or P/L over the life
of debn in ratio of o/s NV of debn during the year.

 When debn are redeemed at premium then an addn

Entry must be passed :
Loss on issue of debn (LOID) Dr
To Premium of redemption of deb n(PROD)
 Premium on redemption of pref sh is written off (w/o) in
the year of redemption because Pref sh is not our
liability . so premium on redemption of pref sh can’t be
treated as a liability. Where as PROD is a liab so w/o
every year till date of redemption.
 If debn are redeemable at disc then disc on redempn is a
gain but will be recorded only on redemption due to
concept of conservatism where future expected profit
 cannot be recognized now but future losses must be
recognized.

Redempn of debn :
4 methods of redemption of debn :
 By payment in lumpsum:
The debn is redeemed at the end of specified period
 By payment in instalments:
Say 1/5th debn redeemed every year.
 By purchase of own debn in open market and cancelling
it
 By conversion of debn into shares.

By conversion of debn into shares:

 Can be redeemed by issuing shares.

 Secn 53 of co. act 2013 does not allow company to issue
shares at discount except for Sweat eq shares. There
shares issued on redemption of debn can only be issued
at par or premium.
 They can be fully or partly convertible.
 JE:

 Redemption of debentures at par (100)

o Sh issued at par : FV of shares = 10
 No. of shares issued =
Amt payable to debn holder in sh
Issue price per shares
 9% debn a/c Dr
To eq sh cap a/c

o Sh issued at premium : issued at 25 fv=10

 No. shares issued = 100/25
 9% debn a/c Dr
To eq sh cap a/c
To SP a/c (gain)

 Redemption of debn at premium: (110)

o Sh issued at par: fv of sh =10
 No. of eq sh to be issued = 110/10
 9% debn a/c Dr
PROD a/c Dr
To eq sh a/c
o Sh issued at premium : issued at 55 fv=10
 No. of eq sh issued : 110/55
 9% debn a/c Dr
PROD a/c Dr
To eq sh cap a/c
To SP a/c
 Redemption of debn at Discount : ( 90)
o Sh issued at par :
 No. of eq sh to be issued : 90/ 10
 9% debn a/c Dr
To eq sh cap a/c
To discount on redemption of debn
o Sh issued at premium : issued at 45 FV = 10
 No. eq sh issued : 90/45
 9% debn a/c Dr
To eq sh cap a/c
To SP a/c
To discount on redemption of debn

 Note: when debn are to be redeemed by converting into

shares then requirement of DRR and DRRI will apply only
on non-convertible portion of debn .