Issue and Redemption of Debentures

Issue and Redemption of Debentures

1. Introduction to Debentures

Debentures are long-term debt instruments issued by a company to borrow money from the public. They are a type of loan that the company must repay at a future date, along with periodic interest payments. Debenture holders are creditors of the company, not owners.

2. Types of Debentures

• Secured Debentures: These debentures are secured by a charge on the assets of the company.
• Unsecured Debentures: These debentures are not backed by any collateral.
• Convertible Debentures: These debentures can be converted into equity shares of the company at a later date.
• Non-Convertible Debentures: These debentures cannot be converted into equity shares.
• Redeemable Debentures: These debentures are repaid by the company at a specified future date.
• Irredeemable (Perpetual) Debentures: These debentures are not repayable during the lifetime of the company.
• Registered Debentures: The name of the holder is recorded in the register of debenture holders.
• Bearer Debentures: These debentures are transferable by mere delivery and do not require registration of transfer.

3. Issue of Debentures

Debentures can be issued at par, at a premium, or at a discount. The issue of debentures involves recording the receipt of funds and the obligation to repay.

1. Issue of Debentures at Par

   Bank A/c                         Dr.
     To Debentures A/c
   (Being the issue of debentures at par)

2. Issue of Debentures at Premium

   Bank A/c                         Dr.
     To Debentures A/c
     To Securities Premium A/c
   (Being the issue of debentures at a premium)

3. Issue of Debentures at Discount

   Bank A/c                         Dr.
   Discount on Issue of Debentures A/c Dr.
     To Debentures A/c
   (Being the issue of debentures at a discount)

4. Interest on Debentures

Interest on debentures is an expense for the company and is usually paid semi-annually or annually.

   Interest on Debentures A/c       Dr.
     To Bank A/c
   (Being the payment of interest on debentures)

5. Redemption of Debentures

The redemption of debentures refers to the repayment of the principal amount to debenture holders at the end of the agreed period. Redemption can be done out of profits or from the proceeds of a new issue.

1. Redemption Out of Profits

   Profit and Loss Appropriation A/c Dr.
     To Debenture Redemption Reserve A/c
   (Being the transfer to debenture redemption reserve)

   Debentures A/c                    Dr.
     To Bank A/c
   (Being the redemption of debentures)

2. Redemption Out of Capital

   Debentures A/c                    Dr.
     To Bank A/c
   (Being the redemption of debentures)

3. Redemption Out of Fresh Issue

   Bank A/c                         Dr.
     To Debentures A/c
   (Being the issue of new debentures)

   Debentures A/c                    Dr.
     To Bank A/c
   (Being the redemption of old debentures)

6. Methods of Redemption

1. Lump Sum Payment: Debentures are redeemed in a single payment at the end of the term.
2. Instalment Payments: Debentures are redeemed in parts over several periods.
3. Purchase in Open Market: The company buys back its debentures from the market.
4. Conversion: Convertible debentures are converted into shares of the company.

7. Provision for Debenture Redemption Reserve (DRR)

As per regulatory requirements, companies must create a Debenture Redemption Reserve (DRR) to ensure funds are available for the redemption of debentures. The amount to be transferred to DRR is a specific percentage of the debenture issue, and it is created out of profits before declaring dividends.

   Profit and Loss Appropriation A/c Dr.
     To Debenture Redemption Reserve A/c
   (Being the creation of debenture redemption reserve)

8. Journal Entries for Redemption

1. For Redemption at Par

   Debentures A/c                    Dr.
     To Bank A/c
   (Being the redemption of debentures at par)

2. For Redemption at Premium

   Debentures A/c                    Dr.
   Premium on Redemption of Debentures A/c Dr.
     To Bank A/c
   (Being the redemption of debentures at premium)

3. For Transfer to Debenture Redemption Reserve

   Profit and Loss Appropriation A/c Dr.
     To Debenture Redemption Reserve A/c
   (Being the transfer to debenture redemption reserve)

4. Utilization of Debenture Redemption Reserve

   Debenture Redemption Reserve A/c Dr.
     To General Reserve A/c
   (Being the utilization of debenture redemption reserve after redemption)

9. Key Points to Remember

• Interest Payment: Debenture interest is a charge against profits and must be paid even if the company does not make a profit.
• DRR Requirement: The creation of DRR is mandatory for ensuring funds availability at the time of redemption.
• Accounting for Premium/Discount: The treatment of premium or discount on issue and redemption must be done as per accounting standards.
• Conversion Rights: For convertible debentures, the terms of conversion must be clearly stated and followed.

Conclusion

Understanding the process of issuing and redeeming debentures is crucial for managing a company’s long-term financing. Proper accounting for debentures ensures accurate financial reporting and compliance with legal requirements.