Redemption of Debentures: Notes | Accounting for CA Intermediate (Old Scheme) PDF Download

 Page 1


? 
LEARNING OUTCOMES 
33 
*    
  
 
 
REDEMPTION OF 
DEBENTURES 
 
 
 
After studying this chapter, you will be able to– 
? Understand about the redemption of debentures; 
? Understand the requirement of creation of a Debenture 
Redemption Reserve and creation of Debenture Redemption 
Fund (i.e. making investments for purpose of redemption of 
debentures); 
? Understand various methods of redemption of debentures; 
? Understand the accounting treatment of redemption of 
debentures; 
? Solve problems based on redemption of debentures. 
 
 
 
 
 
CHAPTER 
8 
Page 2


? 
LEARNING OUTCOMES 
33 
*    
  
 
 
REDEMPTION OF 
DEBENTURES 
 
 
 
After studying this chapter, you will be able to– 
? Understand about the redemption of debentures; 
? Understand the requirement of creation of a Debenture 
Redemption Reserve and creation of Debenture Redemption 
Fund (i.e. making investments for purpose of redemption of 
debentures); 
? Understand various methods of redemption of debentures; 
? Understand the accounting treatment of redemption of 
debentures; 
? Solve problems based on redemption of debentures. 
 
 
 
 
 
CHAPTER 
8 
 
 
8.2 
 
ACCOUNTING 
  
 
 
 
Types of Debentures
Security
Secured Debentures
Unsecured Debentures
Convertibility
Covertible Debentures
Non-convertible 
Debentures
Permanence
Redeemable Debentures
Irredeembale Debentures
Negotiability
Registered Debentures 
Bearer Debentures
Priority
First Mortgage 
Debentures
Second Mortgage 
Debentures
Methods of Redemption of 
Debentures
By payment in 
Lumpsum
By 
payment in 
instalments
By purchase in 
open market
By 
conversion 
into shares
 
Page 3


? 
LEARNING OUTCOMES 
33 
*    
  
 
 
REDEMPTION OF 
DEBENTURES 
 
 
 
After studying this chapter, you will be able to– 
? Understand about the redemption of debentures; 
? Understand the requirement of creation of a Debenture 
Redemption Reserve and creation of Debenture Redemption 
Fund (i.e. making investments for purpose of redemption of 
debentures); 
? Understand various methods of redemption of debentures; 
? Understand the accounting treatment of redemption of 
debentures; 
? Solve problems based on redemption of debentures. 
 
 
 
 
 
CHAPTER 
8 
 
 
8.2 
 
ACCOUNTING 
  
 
 
 
Types of Debentures
Security
Secured Debentures
Unsecured Debentures
Convertibility
Covertible Debentures
Non-convertible 
Debentures
Permanence
Redeemable Debentures
Irredeembale Debentures
Negotiability
Registered Debentures 
Bearer Debentures
Priority
First Mortgage 
Debentures
Second Mortgage 
Debentures
Methods of Redemption of 
Debentures
By payment in 
Lumpsum
By 
payment in 
instalments
By purchase in 
open market
By 
conversion 
into shares
 
 
 
8.3 
 
REDEMPTION OF DEBENTURES 
 
 
 1.  INTRODUCTION 
A debenture is an instrument issued by a company under its seal, acknowledging a 
debt and containing provisions as regards repayment of the principal and interest. 
Under Section 71 (1) of the Companies Act, 2013, a company may issue debentures 
with an option to convert such debentures into shares, either wholly or partly at 
the time of redemption.  
Provisions under the Companies Act, 2013 
for Issue of Debentures 
Section 71 (1)
A company may 
issue debentures 
with an option to 
convert such 
debentures into 
shares, either 
wholly or partly 
at the time of 
redemption. 
Provided that the issue 
of debentures with an 
option to convert such 
debentures into shares, 
wholly or partly, should 
be approved by a 
special resolution 
passed at a duly 
convened general 
meeting. 
Section 71 (2) 
No company can 
issue any 
debentures 
which carry any 
voting rights. 
Section 71 (4)
Where debentures 
are issued by a 
company, then the 
company should 
create a debenture 
redemption reserve 
account out of the 
profits of the 
company available 
for payment of 
dividend and the 
amount credited to 
such account 
should not be 
utilised by the 
company for any 
purpose other than 
the redemption of 
debentures.
Page 4


? 
LEARNING OUTCOMES 
33 
*    
  
 
 
REDEMPTION OF 
DEBENTURES 
 
 
 
After studying this chapter, you will be able to– 
? Understand about the redemption of debentures; 
? Understand the requirement of creation of a Debenture 
Redemption Reserve and creation of Debenture Redemption 
Fund (i.e. making investments for purpose of redemption of 
debentures); 
? Understand various methods of redemption of debentures; 
? Understand the accounting treatment of redemption of 
debentures; 
? Solve problems based on redemption of debentures. 
 
 
 
 
 
CHAPTER 
8 
 
 
8.2 
 
ACCOUNTING 
  
 
 
 
Types of Debentures
Security
Secured Debentures
Unsecured Debentures
Convertibility
Covertible Debentures
Non-convertible 
Debentures
Permanence
Redeemable Debentures
Irredeembale Debentures
Negotiability
Registered Debentures 
Bearer Debentures
Priority
First Mortgage 
Debentures
Second Mortgage 
Debentures
Methods of Redemption of 
Debentures
By payment in 
Lumpsum
By 
payment in 
instalments
By purchase in 
open market
By 
conversion 
into shares
 
 
 
8.3 
 
REDEMPTION OF DEBENTURES 
 
 
 1.  INTRODUCTION 
A debenture is an instrument issued by a company under its seal, acknowledging a 
debt and containing provisions as regards repayment of the principal and interest. 
Under Section 71 (1) of the Companies Act, 2013, a company may issue debentures 
with an option to convert such debentures into shares, either wholly or partly at 
the time of redemption.  
Provisions under the Companies Act, 2013 
for Issue of Debentures 
Section 71 (1)
A company may 
issue debentures 
with an option to 
convert such 
debentures into 
shares, either 
wholly or partly 
at the time of 
redemption. 
Provided that the issue 
of debentures with an 
option to convert such 
debentures into shares, 
wholly or partly, should 
be approved by a 
special resolution 
passed at a duly 
convened general 
meeting. 
Section 71 (2) 
No company can 
issue any 
debentures 
which carry any 
voting rights. 
Section 71 (4)
Where debentures 
are issued by a 
company, then the 
company should 
create a debenture 
redemption reserve 
account out of the 
profits of the 
company available 
for payment of 
dividend and the 
amount credited to 
such account 
should not be 
utilised by the 
company for any 
purpose other than 
the redemption of 
debentures.
 
 
8.4 
 
ACCOUNTING 
Provided that the issue of debentures with an option to convert such debentures 
into shares, wholly or partly, should be approved by a special resolution passed at 
a duly convened general meeting.  
Section 71 (2) further provides that no company can issue any debentures which 
carry any voting rights.  
Section 71 (4) provides that where debentures are issued by a company, the 
company should create a debenture redemption reserve account out of the profits 
of the company available for payment of dividend and the amount credited to such 
account should not be utilized by the company for any purpose other than the 
redemption of debentures. 
Basic provisions  
If a charge has been created on any asset or the entire assets of the company,  
? the nature of the charge 
? the asset(s) charged  
are described therein.  
? Since the charge is not valid unless registered with the Registrar, his 
certificate registering the charge is printed on the bond. 
? It is also customary to create a trusteeship in favour of one or more persons 
in the case of mortgage debentures. The trustees of debenture holders have 
all powers of a mortgage of a property and can act in whatever manner they 
think necessary to safeguard the interest of debenture holders.  
As per Rule 18(2) of the Companies (Share Capital and Debentures) Rules, 2014, the 
company shall appoint debenture trustees as required under sub-section (5) of 
section 71 of the Companies Act 2013, after complying with certain conditions 
mentioned in that rule. 
Note: Issue of debentures has already been discussed in detail at Foundation level. 
Students are advised to refer the Foundation Study Material - Chapter 10 for 
understanding of the requirements relating to issue of debentures. 
 
 
Page 5


? 
LEARNING OUTCOMES 
33 
*    
  
 
 
REDEMPTION OF 
DEBENTURES 
 
 
 
After studying this chapter, you will be able to– 
? Understand about the redemption of debentures; 
? Understand the requirement of creation of a Debenture 
Redemption Reserve and creation of Debenture Redemption 
Fund (i.e. making investments for purpose of redemption of 
debentures); 
? Understand various methods of redemption of debentures; 
? Understand the accounting treatment of redemption of 
debentures; 
? Solve problems based on redemption of debentures. 
 
 
 
 
 
CHAPTER 
8 
 
 
8.2 
 
ACCOUNTING 
  
 
 
 
Types of Debentures
Security
Secured Debentures
Unsecured Debentures
Convertibility
Covertible Debentures
Non-convertible 
Debentures
Permanence
Redeemable Debentures
Irredeembale Debentures
Negotiability
Registered Debentures 
Bearer Debentures
Priority
First Mortgage 
Debentures
Second Mortgage 
Debentures
Methods of Redemption of 
Debentures
By payment in 
Lumpsum
By 
payment in 
instalments
By purchase in 
open market
By 
conversion 
into shares
 
 
 
8.3 
 
REDEMPTION OF DEBENTURES 
 
 
 1.  INTRODUCTION 
A debenture is an instrument issued by a company under its seal, acknowledging a 
debt and containing provisions as regards repayment of the principal and interest. 
Under Section 71 (1) of the Companies Act, 2013, a company may issue debentures 
with an option to convert such debentures into shares, either wholly or partly at 
the time of redemption.  
Provisions under the Companies Act, 2013 
for Issue of Debentures 
Section 71 (1)
A company may 
issue debentures 
with an option to 
convert such 
debentures into 
shares, either 
wholly or partly 
at the time of 
redemption. 
Provided that the issue 
of debentures with an 
option to convert such 
debentures into shares, 
wholly or partly, should 
be approved by a 
special resolution 
passed at a duly 
convened general 
meeting. 
Section 71 (2) 
No company can 
issue any 
debentures 
which carry any 
voting rights. 
Section 71 (4)
Where debentures 
are issued by a 
company, then the 
company should 
create a debenture 
redemption reserve 
account out of the 
profits of the 
company available 
for payment of 
dividend and the 
amount credited to 
such account 
should not be 
utilised by the 
company for any 
purpose other than 
the redemption of 
debentures.
 
 
8.4 
 
ACCOUNTING 
Provided that the issue of debentures with an option to convert such debentures 
into shares, wholly or partly, should be approved by a special resolution passed at 
a duly convened general meeting.  
Section 71 (2) further provides that no company can issue any debentures which 
carry any voting rights.  
Section 71 (4) provides that where debentures are issued by a company, the 
company should create a debenture redemption reserve account out of the profits 
of the company available for payment of dividend and the amount credited to such 
account should not be utilized by the company for any purpose other than the 
redemption of debentures. 
Basic provisions  
If a charge has been created on any asset or the entire assets of the company,  
? the nature of the charge 
? the asset(s) charged  
are described therein.  
? Since the charge is not valid unless registered with the Registrar, his 
certificate registering the charge is printed on the bond. 
? It is also customary to create a trusteeship in favour of one or more persons 
in the case of mortgage debentures. The trustees of debenture holders have 
all powers of a mortgage of a property and can act in whatever manner they 
think necessary to safeguard the interest of debenture holders.  
As per Rule 18(2) of the Companies (Share Capital and Debentures) Rules, 2014, the 
company shall appoint debenture trustees as required under sub-section (5) of 
section 71 of the Companies Act 2013, after complying with certain conditions 
mentioned in that rule. 
Note: Issue of debentures has already been discussed in detail at Foundation level. 
Students are advised to refer the Foundation Study Material - Chapter 10 for 
understanding of the requirements relating to issue of debentures. 
 
 
 
 
8.5 
 
REDEMPTION OF DEBENTURES 
 
 2.  REDEMPTION OF DEBENTURES 
Debentures are usually redeemable i.e. either redeemed in cash or convertible after 
a time period.  
Redeemable debentures may be redeemed: 
? after a fixed number of years; or  
? any time after a certain number of years has elapsed since their issue; or 
? on giving a specified notice; or  
? by annual drawing. 
A company may also purchase its debentures, as and when convenient, in the open 
market. When the debentures are quoted at a discount on the Stock Exchange, it 
may be profitable for the company to purchase and cancel them. 
As per Rule 18 (1) of the Companies (Share Capital and Debentures) Rules, 2014, a 
company shall not issue secured debentures, unless it complies with the following 
conditions, namely: 
a. An issue of secured debentures may be made, provided the date of its 
redemption shall not exceed ten years from the date of issue: 
Provided that the following classes of companies may issue secured 
debentures for a period exceeding ten years but not exceeding thirty years,  
(i)  Companies engaged in setting up of infrastructure projects;  
(ii)  Infrastructure Finance Companies' as defined in clause (viia) of sub-
direction (1) of direction 2 of Non-Banking Financial (Non-deposit 
Accepting or Holding) Companies Prudential Norms (Reserve Bank) 
Directions, 2007;  
(iii)  Infrastructure Debt Fund Non-Banking Financial Companies' as defined 
in clause (b) of direction 3 of Infrastructure Debt Fund Non-Banking 
Financial Companies (Reserve Bank) Directions, 2011;  
(iv)  Companies permitted by a Ministry or Department of the Central 
Government or by Reserve Bank of India or by the National Housing 
Bank or by any other statutory authority to issue debentures for a 
period exceeding ten years.