Page 178 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 8: Methods of Redemption–I

8.1 Meaning Notes

Redemption of debentures means repayment of the amount of debentures to debenture-holders
or the discharge of the liability of debentures according to the terms of redemption given in the
Trust Deed of the debentures, or in the prospectus inviting the application for the debentures.
The redeemed debentures can be reissued if the conditions laid down in Section 121 of the
Companies Act are satisfied.
SEBI Guidelines for the Protection of Debenture-holders’ Interest
From the accounting point of view some important guidelines of SEBI are as follows:
1. All companies that raise resources through the issue of debentures must create a Debentures
Redemption Reserve (DRR). This reserve must be equal to 50% of the amount of debentures
issued before the redemption of debentures takes place.
Drawal from Debentures Redemption Reserve is permissible for the purpose of redemption
only after 40% of debentures liability has been actually redeemed by the company.
2. Thus, a company cannot redeem its debentures purely out of capital or out of profit.
3. There is no need to create a DRR in the following cases:
(i) if the debentures are issued for a period of 18 months or less.
(ii) if convertible debentures are issued by the company.

(iii) if a company has created a sinking fund of the equivalent amount of debentures
issue (but no redemption will commence unless the sinking fund accumulates a sum
of 50% of the amount of debenture issue).
(iv) if the debentures are issued for raising project finance, a moratorium upto the date
of commercial production can be provided for the creation of DRR.
4. In case of convertible debentures, DRR should be created for the non-convertible component.
DRR should be treated as general reserve for considering proposals of bonus issue.
5. If there is any balance in the DRR after the redemption of debentures, it is transferred to
general reserve (as being the nature of undistributed profits) and will be available for the
distribution of dividend.
6. For the determination of rate of interest on debentures, companies are independent.
7. There should be clear information in the prospectus regarding the premium payable and
time of redemption.
8. Thus a company can not redeem its debentures purely out of capital or out of profit.

Notes Discharge of debenture liability is usually by paying cash to the debenture holders.

8.2 Sources of Finance for Redemption

In order to avoid financial difficulties when debentures become due for redemption, it is necessary
to make arrangements for the accumulation of addition funds for the purpose of redemption. A
company may use the following options in this regard:
1. Redemption of debentures out of capital.

2. Redemption of debentures by conversion into shares or new debentures.

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