Page 177 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I Gopika Juneja, Lovely Professional University

Notes Unit 8: Methods of Redemption–I

CONTENTS
Objectives
Introduction

8.1 Meaning
8.2 Sources of Finance for Redemption
8.2.1 Redemption Out of Capital

8.2.2 Redemption of Debentures by Conversion
8.2.3 Redemption of Debentures Out of Profit
8.2.4 Non-cumulative Sinking Fund
8.3 Insurance Policy Method
8.4 Summary

8.5 Keywords
8.6 Review Questions
8.7 Further Readings

Objectives

After studying this unit, you should be able to:
 Know redemption meaning and its methods
 Explain sources of finance for redemption
 Define redemption by conversion

 Understand some important points related to debentures redemption fund
 Know non-cumulative Sinking Fund
 Understand insurance policy method

Introduction

Redemption of debentures is the process of discharging the liability on account of debentures in
accordance with the terms of redemption stated in the debenture trust deed. Discharge of
debenture liability is usually by paying cash to the debenture holders. But this can take other
forms such as conversion or rolover. In the case of conversion debentures are converted into
preference shares or equity shares. Rollover refers to the issue of new debentures, in exchange
for the old ones. Both conversion and rollover are subject to detailed SEBI guidelines. When a
company issues debentures it must also plan the resources required for such redemption. This
can be done by setting aside profits every year and investing them wisely in investments
outside, so that there will be no liquidity problem at the time of redemption. Alternatively the
company can take an insurance policy by paying regular premium, so that the policy matures
coinciding with the time of redemption. With the amount received on the maturity of policy the
company faces no problem in carrying out the redemption.

170 LOVELY PROFESSIONAL UNIVERSITY