Issue and Redemption of Debentures

Types of Debentures

• Secured (Mortgage) Debentures: Backed by a charge on company assets.
• Unsecured (Naked) Debentures: No charge on assets; higher risk to holders.
• Convertible Debentures: Can be converted into equity shares after a specified period. May be Fully Convertible (FCD) or Partly Convertible (PCD).
• Non-Convertible Debentures (NCD): Cannot be converted; repaid in cash.
• Redeemable Debentures: Repaid after a fixed term.
• Irredeemable (Perpetual) Debentures: No fixed repayment date; extremely rare.
• Registered Debentures: Name of holder recorded; transfer requires a deed.
• Bearer Debentures: Transferable by mere delivery; no register maintained.

Issue of Debentures

Debentures may be issued at par, at a premium, or at a discount, and may be redeemed at par or at a premium.

• Key terms:
• Issue at par: Issue price = Face value (e.g., Rs. 100 issued at Rs. 100)
• Issue at premium: Issue price > Face value (e.g., Rs. 100 issued at Rs. 110)
• Issue at discount: Issue price < Face value (e.g., Rs. 100 issued at Rs. 90) — treated as a loss
• Redemption at par: Redemption price = Face value
• Redemption at premium: Redemption price > Face value — the premium is a liability (Loss on Redemption)

Journal Entries for Issue of Debentures

• Issued at par, redeemable at par:
• Bank A/c Dr (with application/allotment money)
• To Debenture Application & Allotment A/c
• Debenture Application & Allotment A/c Dr
• To X% Debentures A/c

• Issued at discount, redeemable at par:
• Discount on Issue of Debentures A/c Dr
• Bank A/c Dr
• To X% Debentures A/c

• Issued at par, redeemable at premium:
• Bank A/c Dr
• Loss on Issue of Debentures A/c Dr
• To X% Debentures A/c
• To Premium on Redemption of Debentures A/c

Debentures Issued as Collateral Security

When debentures are pledged as collateral (secondary) security against a loan, no entry is required in the main books; only a note is made. Alternatively, a memorandum entry may be passed.

Interest on Debentures

Interest on debentures is a charge against profits (not an appropriation). It is calculated on the face value at the stated rate.

• Journal Entry:
• Debenture Interest A/c Dr
• To Debenture Holders A/c / Bank A/c
• TDS payable is deducted and shown separately.

• Worked Example 1: Issue at Par
• A company issues 1,000, 10% Debentures of Rs. 100 each at par, repayable at par.
• Total proceeds = 1,000 x Rs. 100 = Rs. 1,00,000
• Entry: Bank A/c Dr 1,00,000 | To 10% Debentures A/c 1,00,000

• Worked Example 2: Issue at Discount
• A company issues 500 debentures of Rs. 100 each at 10% discount, redeemable at par.
• Issue price = Rs. 90; Cash received = 500 x 90 = Rs. 45,000
• Discount = 500 x 10 = Rs. 5,000
• Entry: Bank A/c Dr 45,000; Discount on Issue A/c Dr 5,000 | To Debentures A/c 50,000

• Worked Example 3: Issue at Premium
• A company issues 200 debentures of Rs. 100 each at Rs. 110, redeemable at par.
• Cash received = 200 x 110 = Rs. 22,000
• Premium = 200 x 10 = Rs. 2,000
• Entry: Bank A/c Dr 22,000 | To Debentures A/c 20,000; To Securities Premium Reserve A/c 2,000

• Worked Example 4: Issue at Par, Redeemable at Premium
• 500 debentures of Rs. 100 issued at par, redeemable at Rs. 105.
• Cash received = 500 x 100 = Rs. 50,000; Premium on redemption = 500 x 5 = Rs. 2,500
• Entry: Bank A/c Dr 50,000; Loss on Issue A/c Dr 2,500 | To Debentures A/c 50,000; To Premium on Redemption A/c 2,500

• Worked Example 5: Redemption by Purchase in Open Market
• A company has Rs. 2,00,000 worth of 12% debentures outstanding. It purchases debentures of face value Rs. 20,000 from the open market at Rs. 95 per Rs. 100.
• Amount paid = 20,000 x 95/100 = Rs. 19,000
• Profit on cancellation = Rs. 20,000 - Rs. 19,000 = Rs. 1,000 (credited to Capital Reserve)

Worked Example 6: Redemption out of Profits (Debenture Redemption Reserve)
The Companies Act requires companies to create a Debenture Redemption Reserve (DRR) before redeeming debentures. An amount equal to at least 10% of outstanding debentures must be transferred to DRR before redemption commences (as per revised rules applicable to listed companies; check current SEBI norms for updates).
- Entry for DRR: Surplus (P&L) A/c Dr | To Debenture Redemption Reserve A/c

• Worked Example 7: Interest on Debentures
• Annual interest on Rs. 5,00,000, 9% Debentures = Rs. 5,00,000 x 9/100 = Rs. 45,000.
• Entry: Debenture Interest A/c Dr 45,000 | To Bank A/c 45,000
• At year end: Statement of P&L Dr 45,000 | To Debenture Interest A/c 45,000

Methods of Redemption

1. 1.Lump sum (bullet) payment at the end of the debenture term.
2. 2.By purchase in the open market — company buys own debentures below face value; profit credited to Capital Reserve.
3. 3.By conversion into shares or new debentures.
4. 4.By draw of lots (for serial/instalment redemption).

Debenture Redemption Reserve (DRR) and Investment

• Per SEBI and Companies Act norms:
• Listed companies must invest at least 15% of the debentures maturing in the next financial year in specified securities (Debenture Redemption Investment).
• The DRR is transferred to General Reserve after redemption.

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Debentures are fixed-interest borrowings. They can be issued at par, premium, or discount and redeemed at par or premium. Discounts and redemption premiums are capital losses charged over the debenture's life. Interest is an expense. DRR must be created from profits before redemption. Open-market purchase profit goes to Capital Reserve.