Issue and Redemption of Debentures

Issue and Redemption of Debentures

Issue of Debentures

Debentures are a type of long-term debt instrument issued by companies to raise capital. They represent a loan taken by the company from debenture holders, to be repaid at a future date along with interest. The issue of debentures is similar to the issue of shares, involving the collection of funds either in lump-sum or in installments.

• Definition and Components:
  • The term 'debenture' comes from the Latin word 'debere,' meaning 'to borrow.'
  • A debenture is a written acknowledgment of debt, including an agreement for the repayment of the principal and interest at fixed dates.
  • Under Section 2(30) of The Companies Act, 2013, 'debenture' includes debenture stock, bonds, and other securities, with or without a charge on the company's assets.
• Types of Debenture Issue:
  • For Cash: Debentures can be issued in exchange for cash payments, either as a lump sum or in installments.
  • For Consideration Other than Cash: Debentures may be issued in exchange for assets or services.
  • Collateral Security: Debentures can be issued as collateral for loans, providing additional security to the lender.

Redemption of Debentures

Redemption of debentures refers to the repayment of the principal amount to debenture holders at the end of the term. There are several methods of redeeming debentures, each with distinct accounting treatments.

• Lump Sum Method:
  • The company repays the entire amount in one payment on a specified date, as per the terms of the debenture issue.
  • Companies must plan their finances in advance and set aside funds for this purpose.
  • Debenture Redemption Reserve (DRR): According to the Companies Act and SEBI guidelines, companies must create a DRR by setting aside a portion of profits annually. This reserve can only be used for redeeming debentures.
• Installment Method:
  • Also known as the drawing of lots method, debentures are redeemed in lots or installments over a period.
  • This method provides flexibility to the company, spreading out the repayment over time.
• Conversion Method:
  • Instead of repaying the principal amount, the company can convert debentures into new debentures or equity shares.
  • Convertible Debentures: These can be converted into new debentures or equity shares at par, premium, or discount, as specified in the terms of issue.
• Purchasing Method:
  • The company buys back its debentures from the open market and cancels them immediately.
  • This method allows the company to defer redemption until a suitable time.
  • If debentures are bought back at a discount, the company can make additional profits.

Key Points

• Planning and Compliance: Proper planning and adherence to regulatory guidelines are crucial in both the issue and redemption of debentures.
• Financial Management: Companies must manage their finances to ensure they can meet redemption obligations without impacting other operations.
• Flexibility: Different redemption methods provide flexibility in managing the company's debt obligations.

Understanding the process and implications of issuing and redeeming debentures is essential for companies to manage their debt efficiently and for investors to make informed decisions.