Redemption of Debentures

  • Repayment of principal amount of a debt before maturity is known as redemption of debentures. The sources of redemption of debentures are by raising fresh capital, sale of assets, utilisation of profits or by utilisation of surplus funds.
  • Debentures can be redeemed out of capital or out of profits.
  • In case of redemption out of capital, redemption is done without transferring the amount to DebentureRedemption Reserve.
  • When DRR is created for redemption, it is redemption out of profits. DRR of at least 25% of the value of debentures to be redeemed is to be created before redemption starts.
  • The company is also required to invest in specified securities, at least 15% of the amount of debentures maturing for payment by 30th April. This amount shall not be utilised for any other purpose other than redemption of debentures.
  • The three methods of redemption are lump sum method, draw of lots and purchase from open market method.
  • In lumpsum method redemption can be out of profits or out of capital. The amount due to debenture holders is paid at one time on maturity date. Debenture Redemption Investment may earn interest income that is subjected to tax deducted at source.
  • In draw of lots serial numbers of debentures to be redeemed first is decided by draw of lots. There is redemption of a certain portion of debentures as an annual instalment each year.
  • In this method company can invest in specified securities in the first year of redemption and that amount remains invested till the last lot is redeemed.
  • A company can redeem its debentures by purchasing from open market if authorised by its articles.
  • A company can do so for immediately cancellation of debentures or for investment purpose.
  • The benefits of this method are profit on redemption, benefits related to interest and benefits related to premium payable on redemption.
  • In case debentures are purchased for investment purpose than debenture purchased are shown at cost in ‘Assets’ part of Balance Sheet. When company has not cancelled own debentures immediately, interest becomes due on such debentures.
  • Debenture interest account is shown as expense in Statement of P&L and interest on own debentures is shown under the head ‘Other Income’.

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  • Q1

    Mohan Ltd. redeemed 720 debentures of INR 100 each, at INR 102. The amount to be paid will be

    Marks:1
    Answer:

    73,440

    Explanation:

    Amount to be repaid = 72,000 + 1,440 = 73,440

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  • Q2

    The minimum percentage of debentures to be redeemed which is required to invested in specified securities is

    Marks:1
    Answer:

    15%.

    Explanation:

    Companies are required to invest or deposit in specified securities, a sum at least equal to 15% of the amount of debenture maturing during the year ended 31st March of next year.

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  • Q3

    In case the debentures are redeemed by drawing of lots with equal amounts after certain interval, redemption is said to be on

    Marks:1
    Answer:

    fixed installment.

    Explanation:

    When an equal amount is redeemed at certain interval, this type of redemption is called redemption by fixed installments.

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  • Q4

    Under variable instalment method the total discount is written off during the lifetime of debentures in proportion of debentures:

    Marks:1
    Answer:

    outstanding at the beginning of each year.

    Explanation:
    When the debentures are to be redeemed in instalments, the total discount is written off during the lifetime of debentures under variable instalment method. As per this method discount is written off in the proportions of amount outstanding in the beginning of each year.
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  • Q5

    HDFC Ltd is a banking company. It decided to redeem debentures worth INR 2,00,000. The amount required to be transferred to DRR will be

    Marks:1
    Answer:

    nil

    Explanation:

    Following categories of companies are exempt from creating DRR:

    1. All India Financial Institutions (AIFIs) regulated by Reserve Bank of India;

    2. Other Financial Institutions regulated by Reserve Bank of India;

    3. Banking Companies for both public as well as privately placed debentures; and

    4. Housing Finance Companies registered with the National Housing Bank.

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