Page 223 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes Self Assessment

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12. In cum ………………… price, no extra payment is to be made for interest of expired period
by the company to the debenture-holder.

13. If the debentures are purchased by the company between interest dates, it is necessary to
find out whether the price paid for such debentures includes the interest of …………………
period or not.
14. Interest burden also reduces if own debenture are purchased from the ……………… market.
15. If the debentures are redeemable at premium and the company ………………… its own
debenture from the open market, it saves that amount equal to the premium which would
have been payable on debentures in the ordinary course of redemption.

9.4 Summary

Redemption of debenture is the discharge of debenture liability. It can be done either by repaying
the money to debenture holders or converting the debenture into shares. The conditions of
redemption are clearly stated at the time of issue of debenture in the prospectus. Debentures can
be redeemed at par, premium or discount as per the terms of issue. The period of maturity,
redemption amount, yield on redemption etc. will be mentioned in the prospectus. In case the
non convertible debentures proposed to be rolled over (repayment extended for an additional
period), a compulsory option should be given to the debenture holders who wish to withdraw
from the debenture programme, as per the guidelines issued by SEBI.
Sources of Funds for Redemption of Debentures

Redemption of debentures is an important commitment to be fulfilled by a joint stock company.
Failure to redeem debentures will disqualify the directors of the company. Moreover, such a
default will invite strict penalties and loss of reputation. As the redemption of debentures drains
a large amount of resources, companies will make advance preparations to meet this need.
(i) Redemption of Debentures - from the proceeds of fresh issue of share capital and debentures

(ii) Redemption of Debentures - out of accumulated profits
Methods of Redemption of Debentures
(i) Redemption In lump-sum, at the end of stipulated period: Under this method the entire
debentures are redeemed at the stipulated date stated in the prospectus for the issue of
debentures. The drawback of this method is that the company has to arrange a large
amount at the time of redemption. Usually companies prepare well advance for the
redemption of debentures.
(ii) By Draw of Lots: Under this method the company does not redeem all the debentures at
the same time. Instead it will call back only a portion of its debentures in the market for
redemption each year. The company select the debentures of a predetermined value, by
drawing lot and they are redeemed that year. This method of redemption reduces the
burden of redemption. Planning is relatively easy and the impact of redemption on the
finance of the company is limited.
(iii) By Purchasing in the Open Market: Debentures can be redeemed by purchasing them
from the open market. If a company finds its debentures are available in the open market
at cheap rate it will purchase those debentures and cancel them.

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