Accounting for Redemption of Debenture

Redemption of Debentures: It refers to repayment of amount of Debentures to Debentureholders for discharge of its Liability towards Debentures. Points to be considered at the time of Redemption: Debentures are normally redeemed on maturity date, However, it can be redeemed before maturity by Draw of lots, Purchase from Open Market for Cancellation or by Conversion into Shares or New Debentures; If Article of Association of Company authorises it and if the terms and conditions of Debentures permit it. Debentures can be redeemed either at Par or Premium as per the terms of issue. In case of Purchase from Open Market for Cancellation, money paid for Purchase of Debentures is the amount of Redemption. Sources of Redemption: 1. Out of Capital: No transfer of adequate Fund to Debenture Redemption Reserve (DRR). However, Rule 18 (7) of Companies (Share Capital & Debentures) Rules of Indian Companies Act 2013; Every Company other than Companies exempted from creating DRR, to transfer at least 25 % of Nominal Value of total Redeemable Debentures of a particular Class to DRR out of Surplus available for Payment as Dividend to Shareholders. 2. Out of Profit: Redemption solely out of Profits. 100 % Nominal value of total Redeemable Debentures are transferred to DRR out of Surplus available for Payment as Dividend to Shareholders. 3. Out of Profit & Capital Both: Redemption of Debentures Partially out of Profit & Partially out of Capital. In this case, Company is not required to transfer 100 % of Face value of Debentures to DRR. At least 25 % is required to be transferred to DRR. Notes: Following points are noteworthy with respect to creation of DRR: If Question is silent Create DRR of 25 % of Face Value of Debentures If Redemption is out of Profit  Transfer 100 % of Face Value of Debentures to DRR. If amount of DRR is given in the question If less than 25 %, value of Debentures is given in the Question, Transfer Balance amount in order to make it 25 %. If more than 25 % is given in the question, transfer that value to DRR. Debenture Redemption Reserve (DRR) Amount set aside out of amount available for Payment as Dividend to Shareholders of the Company. DRR is created on Non Convertible Debentures or Non Convertible part of Debentures in case of Partially Converted Debentures. Adequate Amount is required to be credited to DRR before Redemption begins. Exemptions to Create DRR as Per Indian Companies Act, 2013: 1. All India Financial Institutions & Other Financial Institutions Controlled by RBI. 2. Banking Companies and 3. National Housing Bank. Disclosure of DRR in Balance Sheet: In Equity & Liability Part of Balance Sheet under the Head “Shareholders’ Fund” and Sub Head “Reserve & Surplus”. Debenture Redemption Investment (DRI) Along with DRR, Companies are required to invest 15 % in Specified Securities on or before 30 April of Current year, of Total Face value of Debentures to be redeemed by the next year. For Example X LTD is going to redeem 10000 Debentures of Rs 100 by 31 March 2018, then it has to invest 15 % of redeemable value in Specified Securities on or before 30 April, 2017. Specified Security means: Deposits with any Scheduled Bank, Unencumbered Securities of Central or State Government, Unencumbered Securities as per Section 20 Of Indian Trust Act. 1882 & Unencumbered Bonds issued by any other Company as per Section 20 of Indian Trust Act. 1882. DRI is made by those Companies who are required to create DRR. Companies exempted to create DRR are also exempted to make DRI. Methods of Redemption of Debentures 1. On Maturity in Lump Sum 2. On Installments by Draw of Lots 3. By Purchase From Open Market 4. By Conversion

Accounting for Redemption of Debentures, Debenture Redemption Reserve, Debenture Redemption Investment, Sources & Methods of Redemption of Debentures

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