Page 224 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 9: Methods of Redemption-II

(iv) By Conversion into New Debentures or Shares: Conversion of debentures into shares is Notes
another method of redemption. When debentures are converted to shares, the company
does not pay money to debenture holders. Instead the company issues share certificates in
place of debentures. It may look good for the company because there is no need of cash
payment. But the company is selling its shares. Selling shares is actually selling part of the
ownership. Debenture holders become shareholders. Creditors become owners. It is better
to pay off creditors rather than selling them part of the company. But sometimes company
agree to give some shares to make the issue of debentures more attractive to buyers.
Debenture Redemption Reserve: The newly introduced Section 117C in the Companies Act,
1956 by Companies (Amendment) Act, 2000 has made a bold step in protecting the interests
of debenture holders by making it mandatory for the company to create security and
debenture redemption reserve. Accordingly, it shall now be mandatory for the companies
to create a debenture redemption reserve for the redemption of debentures. The company
shall have to credit adequate amount from out of its profits every year till such debentures
are redeemed.

The debenture reserve shall be used by the company only for the redemption of debentures.
Such redemption shall be in accordance with the terms and conditions of the issue of
debentures. The company shall pay interest due on outstanding debentures as per the
terms and conditions of the issue only.
If a company fails to redeem the debenture on due dates or on maturity, any or more than
one or all the debenture holders can make an application to the Tribunal and then Tribunal
on hearing all the parties concerned may direct by way of an order to redeem the debentures
forthwith by payment of principal and interest due on such debentures.
If default is made in complying with the order of the Tribunal, every officer of the company
who is in default shall be punishable with imprisonment which may extend to 3 years and
shall also be liable to a fine of not less than 500 for every day during which such default
continues.

9.5 Keywords

Cum-interest Price: It is that price of the debenture which includes the interest of the expired
period.
Debentures: It is purchased by a company, if not cancelled immediately, are retained as investment
(popularly known as own debentures).

Draw of Lots: Under this method the company does not redeem all the debentures at the same
time.
Ex-Interest Price: It is that price which does not include the interest of expired period. If ex-
interest price is quoted
Redemption in Lump-sum: Under this method the entire debentures are redeemed at the stipulated
date stated in the prospectus for the issue of debentures.

9.6 Review Questions

1. What is a sinking fund? Explain how it is created.
2. What is debenture interest?
3. Explain the meaning of Ex-interest and Cum-interest.

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