ICAI Notes- Unit 6: Redemption of Debentures | Principles and Practice of Accounting - CA Foundation PDF Download

 Page 1


 
  
 
11.183 
COMPANY ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 6: REDEMPTION OF DEBENTURES 
 
After studying this unit, 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. 
  
© The Institute of Chartered Accountants of India
Page 2


 
  
 
11.183 
COMPANY ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 6: REDEMPTION OF DEBENTURES 
 
After studying this unit, 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. 
  
© The Institute of Chartered Accountants of India
  
 
ACCOUNTING 
1.
184 
 11.184 
 
 
 
  
Methods of Redemption of Debentures
By payment in 
Lumpsum
By payment in 
instalments
By purchase in 
open market
By conversion 
into shares
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 such debentures with 
an option to convert 
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 for any 
purpose other than 
the redemption of 
debentures.
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


 
  
 
11.183 
COMPANY ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 6: REDEMPTION OF DEBENTURES 
 
After studying this unit, 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. 
  
© The Institute of Chartered Accountants of India
  
 
ACCOUNTING 
1.
184 
 11.184 
 
 
 
  
Methods of Redemption of Debentures
By payment in 
Lumpsum
By payment in 
instalments
By purchase in 
open market
By conversion 
into shares
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 such debentures with 
an option to convert 
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 for any 
purpose other than 
the redemption of 
debentures.
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
 
  
 
11.185 
COMPANY ACCOUNTS 
6.1  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.  
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.  
Note: Issue of debentures has already been discussed in detail in unit 3 of Chapter 11.  
  
© The Institute of Chartered Accountants of India
Page 4


 
  
 
11.183 
COMPANY ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 6: REDEMPTION OF DEBENTURES 
 
After studying this unit, 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. 
  
© The Institute of Chartered Accountants of India
  
 
ACCOUNTING 
1.
184 
 11.184 
 
 
 
  
Methods of Redemption of Debentures
By payment in 
Lumpsum
By payment in 
instalments
By purchase in 
open market
By conversion 
into shares
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 such debentures with 
an option to convert 
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 for any 
purpose other than 
the redemption of 
debentures.
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
 
  
 
11.185 
COMPANY ACCOUNTS 
6.1  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.  
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.  
Note: Issue of debentures has already been discussed in detail in unit 3 of Chapter 11.  
  
© The Institute of Chartered Accountants of India
  
 
ACCOUNTING 
1.
186 
 11.186 
6.2  REDEMPTION OF DEBENTURES 
Debentures are usually redeemable i.e. either redeemed in cash or convertible to equity shares 
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. 
6.3 DEBENTURE REDEMPTION RESERVE  
A company issuing debentures may be required to create a debenture redemption reserve 
account out of the profits available for distribution of dividend and amounts credited to such 
account cannot be utilised by the company for any other purpose 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 fall due for payment. 
An appropriate amount is transferred from profits every year to Debenture Redemption 
Reserve and its investment is termed as Debenture Redemption Reserve Investment (or 
Debenture Redemption Fund). In the last year or at the time of redemption of debentures, 
Debenture Redemption Reserve Investments are encashed and the amount so obtained is 
used for the redemption of debentures. 
6.3.1 Requirement to create Debenture Redemption Reserve 
Section 71 of the Companies Act 2013 covers the requirement of creating a debenture 
redemption reserve account. Section 71 states as follows: 
(1) Where a company issues debentures under this section, it should create a debenture 
redemption reserve account out of its profits which are available for distribution of 
dividend every year until such debentures are redeemed. 
(2) The amounts credited to the debenture redemption reserve should not be utilised by 
the company for any purpose except for the purpose aforesaid. 
© The Institute of Chartered Accountants of India
Page 5


 
  
 
11.183 
COMPANY ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 6: REDEMPTION OF DEBENTURES 
 
After studying this unit, 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. 
  
© The Institute of Chartered Accountants of India
  
 
ACCOUNTING 
1.
184 
 11.184 
 
 
 
  
Methods of Redemption of Debentures
By payment in 
Lumpsum
By payment in 
instalments
By purchase in 
open market
By conversion 
into shares
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 such debentures with 
an option to convert 
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 for any 
purpose other than 
the redemption of 
debentures.
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
 
  
 
11.185 
COMPANY ACCOUNTS 
6.1  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.  
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.  
Note: Issue of debentures has already been discussed in detail in unit 3 of Chapter 11.  
  
© The Institute of Chartered Accountants of India
  
 
ACCOUNTING 
1.
186 
 11.186 
6.2  REDEMPTION OF DEBENTURES 
Debentures are usually redeemable i.e. either redeemed in cash or convertible to equity shares 
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. 
6.3 DEBENTURE REDEMPTION RESERVE  
A company issuing debentures may be required to create a debenture redemption reserve 
account out of the profits available for distribution of dividend and amounts credited to such 
account cannot be utilised by the company for any other purpose 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 fall due for payment. 
An appropriate amount is transferred from profits every year to Debenture Redemption 
Reserve and its investment is termed as Debenture Redemption Reserve Investment (or 
Debenture Redemption Fund). In the last year or at the time of redemption of debentures, 
Debenture Redemption Reserve Investments are encashed and the amount so obtained is 
used for the redemption of debentures. 
6.3.1 Requirement to create Debenture Redemption Reserve 
Section 71 of the Companies Act 2013 covers the requirement of creating a debenture 
redemption reserve account. Section 71 states as follows: 
(1) Where a company issues debentures under this section, it should create a debenture 
redemption reserve account out of its profits which are available for distribution of 
dividend every year until such debentures are redeemed. 
(2) The amounts credited to the debenture redemption reserve should not be utilised by 
the company for any purpose except for the purpose aforesaid. 
© The Institute of Chartered Accountants of India
 
  
 
11.187 
COMPANY ACCOUNTS 
(3) The company should pay interest and redeem the debentures in accordance with the 
terms and conditions of their issue. 
(4) Where a company fails to redeem the debentures on the date of maturity or fails to 
pay the interest on debentures when they fall due, the Tribunal may, on the application 
of any or all the holders of debentures or debenture trustee and, after hearing the 
parties concerned, direct, by order, the company to redeem the debentures forthwith 
by the payment of principal and interest due thereon. 
6.3.2 Balance in Debenture Redemption Reserve (DRR) 
When the company decides to establish the Debenture Redemption Reserve Account, the 
amount indicated by the Debenture Redemption Reserves tables is credited to the Debenture 
Redemption Reserve account and debited to profit and loss account.  That shows the intention 
of the company to set aside sum of money to build up a fund for redeeming debentures. 
Immediately, the company should also purchase outside investments. The entry for the purpose 
naturally will be to debit Debenture Redemption Reserve Investments and credit Bank. 
If the debentures are purchased within the interest period, the price would be inclusive of 
interest provided these are purchased “Cum-interest”; but if purchased “Ex-interest”, the 
interest to the date of purchase would be payable to the seller additionally. In order to adjust 
the effect thereof the amount of interest accrued till the date of purchase, if paid, is debited 
to the Interest Account against which the interest for the whole period will be credited. As a 
result, the balance in the account would be left equal to the interest for the period for which 
the debentures were held by the company. 
6.3.3 Adequacy of Debenture Redemption Reserve (DRR) 
As per Rule 18 (7) of the Companies (Share Capital and Debentures) Amendment Rules, 2019, 
the company shall comply with the requirements with regard to Debenture Redemption 
Reserve (DRR) and investment or deposit of sum in respect of debentures maturing during 
the year ending on the 31st day of March of next year (refer para 6.4 below), in accordance 
with the conditions given below— 
the Debenture Redemption Reserve shall be created out of the profits of the company 
available for payment of dividend; the limits with respect to adequacy of DRR and investment 
or deposits, as the case may be, shall be as under: 
S. 
No 
Debentures issued by Adequacy of Debenture 
Redemption Reserve (DRR) 
1 All India Financial Institutions (AIFIs) regulated 
by Reserve Bank of India and Banking 
No DRR is required 
© The Institute of Chartered Accountants of India