Issue of Debentures

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Issue of Debentures: Methods and Procedures

Debentures are a significant source of long-term finance for large companies, alongside equity stocks, bank loans, and bonds. Issuing debentures involves specific procedures and can be executed in various ways, including at par, premium, discount, or for consideration other than cash. This article explains the different methods of issuing debentures and the associated procedures in a detailed and concise manner.

1. Issue of Debentures at Par

When a company issues debentures at par, the issue price is equal to the face value of the debenture. For example, a Rs. 100 debenture is issued at Rs. 100.

  • Procedure:
    • The company releases a prospectus inviting investors to apply.
    • Investors submit their applications along with the payment.
    • The company can collect the total amount either in one installment or in multiple installments (application, allotment, and calls).
  • Accounting:
    • The amount received is recorded as cash in the asset side and as long-term borrowings in the liability side of the balance sheet, requiring no further adjustment.

2. Issue of Debentures at a Discount

When debentures are issued at a discount, the issue price is below the nominal value. For instance, a Rs. 100 debenture issued at Rs. 90.

  • Procedure:
    • The prospectus is released, and applications are invited.
    • Investors apply and pay the discounted price.
  • Accounting:
    • The difference between the nominal value and the issue price (the discount) is considered a capital loss.
    • The discount is recorded as an asset and charged to the 'Securities Premium Account'.
    • The discount can be written off over time.

3. Issue of Debentures at a Premium

When debentures are issued at a premium, the issue price exceeds the nominal value. For example, a Rs. 100 debenture issued at Rs. 105.

  • Procedure:
    • The company invites applications through a prospectus.
    • Investors apply and pay the premium price.
  • Accounting:
    • The premium amount is credited to the 'Securities Premium Account'.
    • This account is reflected under 'Reserves and Surpluses' on the liability side of the balance sheet.

4. Issue of Debentures as Collateral

Debentures can be issued as collateral security to lenders in addition to the primary security.

  • Procedure:
    • The company negotiates with lenders who may require additional security.
    • Debentures are issued to the lenders as collateral.
  • Usage:
    • If the primary security is insufficient to cover the loan, lenders can redeem or sell the debentures to recover the loan amount.

5. Issue of Debentures for Consideration Other Than Cash

Companies may issue debentures as payment for assets or services instead of cash, commonly used with vendors.

  • Procedure:
    • The company agrees with the vendor to issue debentures instead of cash payment.
    • Debentures can be issued at par, premium, or discount.
  • Accounting:
    • The accounting treatment is similar to other types of debenture issuance, depending on whether they are issued at par, premium, or discount.

6. Over Subscription

Oversubscription occurs when applications for debentures exceed the number available.

  • Procedure:
    • The company receives more applications than the debentures offered.
    • Excess applications are refunded if debentures are not allotted to those applicants.
  • Handling Excess Money:
    • Money from applicants who receive debentures is adjusted towards allotment and future calls instead of being refunded.

Summary: Issuing debentures involves several methods, including issuance at par, premium, discount, as collateral, or for consideration other than cash. Each method has specific procedures and accounting treatments. Understanding these processes helps companies efficiently raise funds while ensuring proper financial management.