Issue and Redemption of Debentures

2.1 Core concepts

• Meaning. "Debenture" comes from the Latin debere (to borrow); it is a written instrument acknowledging debt under the common seal, containing a contract to repay principal after a specified period and to pay interest at a fixed rate, usually half-yearly or yearly on fixed dates (NCERT §2.1, p. 75–76).
• Statutory definition. Under §2(30) of the Companies Act, 2013, 'Debenture' includes Debenture Inventory, Bonds and any other securities of a company whether constituting a charge on the company's assets or not (NCERT §2.1, p. 76).
• Bond vs Debenture. Bonds are also instruments acknowledging debt — traditionally issued by Government, now also by semi-government and non-governmental organisations; the two terms are used interchangeably (NCERT §2.1, p. 76).
• Shares vs Debentures. Share = ownership / owned capital, debenture = debt / borrowed capital; return on shares is dividend (appropriation of profit), on debentures is interest (charge on profit, payable even if no profit); shareholders have voting rights, debentureholders do not; debentures are usually secured, shares are not; debentures can be converted into shares only if the issue so provides (NCERT §2.2, p. 76).
• Types — Security: Secured (charge — fixed on a specific asset or floating on general assets) vs Unsecured/Naked (no specific charge; normally not issued) (NCERT §2.3.1, p. 76–77).
• Types — Tenure: Redeemable (payable on expiry of the specified period in lump sum or instalments, at par or at premium) vs Irredeemable / Perpetual (no undertaking to repay; repayable only on winding-up or after a very long period) (NCERT §2.3.2, p. 77).
• Types — Convertibility: Convertible (fully or partly convertible into equity shares / other security at the option of the company or holder) vs Non-Convertible (most debentures fall in this category) (NCERT §2.3.3, p. 77).
• Types — Coupon Rate: Specific Coupon Rate Debentures (carry a fixed or floating rate) vs Zero Coupon Rate Debentures (no specified interest rate — issued at a substantial discount; the discount is treated as the interest) (NCERT §2.3.4, p. 77).
• Types — Registration: Registered Debentures (names, addresses and holdings recorded in the company's register; transferable only by a regular transfer deed) vs Bearer Debentures (transferable by mere delivery; interest paid against coupon attached to the instrument) (NCERT §2.3.5, p. 78).
• Issue of debentures for cash. Procedure parallels share issue — applications received against prospectus, money collected in one instalment or in instalments on application/allotment/calls (NCERT §2.4 and §2.4.1, p. 78–80).
• Issue at par / premium / discount. Issue at par = issue price equals face value; at premium = issue price exceeds face value, premium credited to Securities Premium Reserve A/c (shown under Reserves and Surplus); at discount = issue price less than face value, "Discount on Issue of Debentures A/c" debited (NCERT §2.4.1, §2.4.2, §2.4.3, p. 79–83). The Companies Act, 2013 does not impose any restriction on the issue of debentures at a discount (NCERT §2.4.2, p. 81).
• Issue for consideration other than cash. When debentures are issued to a vendor as purchase consideration for assets, journal entries mirror those of shares for consideration other than cash; the debentures may be issued at par, at premium or at discount, and the number of debentures issued = Purchase Consideration ÷ Issue Price per debenture (NCERT §2.6 + Illustration 11 Note 2, p. 87–93).
• Goodwill / Capital Reserve on purchase of business. If purchase consideration exceeds net assets taken over, the excess is debited to Goodwill A/c; if it is less, the difference is credited to Capital Reserve A/c (NCERT §2.6 + Illustrations 11–12, p. 91–92).
• Issue as collateral security. Debentures issued in addition to a primary security as security for a loan from a bank/FI are called debentures issued as collateral security. Two accounting methods: (i) No journal entry — only a note in the balance sheet below "Long-term borrowings"; (ii) Debenture Suspense A/c Dr. To Debentures A/c, with Debenture Suspense shown as a deduction from debentures in notes to accounts (NCERT §2.7, p. 93–96).
• Six terms of issue + redemption combinations. (i) Par–par, (ii) Discount–par, (iii) Premium–par, (iv) Par–premium, (v) Discount–premium, (vi) Premium–premium. When debentures are redeemable at a premium, the premium payable on redemption is debited to "Loss on Issue of Debentures A/c"; when issued at discount and redeemable at premium, the discount + premium together are debited to Loss on Issue (NCERT §2.8 + Notes after entries, p. 97–99).
• Premium on Redemption. A liability of the company payable in future; it is a provision shown under "Non-current liabilities → Long-term Borrowings" until the debentures are redeemed (NCERT §2.8 Note 2, p. 99).
• Interest on debentures. Interest is calculated on the nominal value at the coupon rate; it is a charge against profit and must be paid whether or not the company has earned profit; the company must deduct TDS at the prescribed rate where applicable (NCERT §2.9 and §2.9.1, p. 104). Journal entries — Debenture Interest A/c Dr. To Income Tax Payable / To Debentureholders; Debentureholders A/c Dr. To Bank; Statement of P&L Dr. To Debenture Interest A/c at year-end (NCERT §2.9.1, p. 104).
• Writing off Discount / Loss on Issue. Discount or loss on issue is a capital loss and is written off in the year of issue itself. Order: first from Securities Premium Reserve [§52(2)] to the extent of its balance, then the balance from Statement of Profit and Loss (NCERT §2.10, p. 106). Within 12 months → "Other Current Assets"; beyond 12 months → "Other Non-Current Assets" (NCERT §2.4.2, p. 81).
• Redemption — four methods. (1) Payment in lump sum; (2) Payment in instalments (specific debentures identified by draw of lots); (3) Purchase in open market for immediate cancellation; (4) Conversion into shares or new debentures (only for convertible debentures) (NCERT §2.11, p. 110).
• Sources of redemption. Out of capital or out of profits (NCERT §2.11, p. 111).
• DRR (Debenture Redemption Reserve) under Companies Act, 2013. All-India financial institutions registered with RBI, banking companies, NBFCs registered with RBI, Housing Finance companies registered with NHB, and listed companies as well as unlisted companies (per the categories specified) are exempted from creating DRR and may redeem out of capital; for "other unlisted companies", DRR adequacy is 10% of the value of outstanding debentures (NCERT §2.11, p. 111).
• DRI (Debenture Redemption Investment). Companies are required to invest/deposit, on or before April 30, an amount not less than 15% of the debentures maturing during the year ending March 31 of the next year, in specified deposits/securities (scheduled bank deposit free from charge; Central/State Govt securities; securities under §20 of the Indian Trusts Act; bonds notified under §20(f) of that Act). The DRI amount cannot be used for any purpose except redemption of debentures maturing during that year (NCERT §2.11, p. 111).
• Redemption — lump sum journal entries. At par: Debentures A/c Dr. / To Debentureholders → Debentureholders A/c Dr. / To Bank. At premium: Debentures A/c Dr. + Premium on Redemption of Debentures A/c Dr. / To Debentureholders → Debentureholders A/c Dr. / To Bank (NCERT §2.12, p. 112–113).
• Redemption — instalments. Actual debentures to be redeemed are picked by draw of lots; entries: Debentures A/c Dr. / To Debentureholders → Debentureholders A/c Dr. / To Bank (NCERT §2.12.2, p. 116).
• Redemption — open market purchase. Two situations: (a) Bought at price below face value: Debentures A/c Dr. / To Bank / To Profit on Redemption — profit transferred to Capital Reserve; (b) Bought above face value: Debentures A/c Dr. + Loss on Redemption Dr. / To Bank — loss transferred to Statement of P&L (NCERT §2.13, p. 130).
• Redemption — conversion. Debentures can be converted into equity shares or new debentures, which may be issued at par, premium or discount. Only the actual proceeds of the original debentures (not the face value) are used to determine the number of shares to be issued if the original debentures were issued at a discount (NCERT §2.14 + §2.11, p. 111, 133).
• Over-subscription. A company cannot allot more debentures than offered; excess money may be retained for adjustment against allotment/calls; money on wholly rejected applications must be refunded (NCERT §2.5, p. 85).

2.2 Definitions to memorise

2.3 Diagrams / processes to remember

• Types of Debenture/Bond tree — classifies debentures across five axes (Security; Tenure; Mode of Redemption/Convertibility; Coupon Rate; Registration) — useful for "Which of the following is NOT a basis of classification?" questions (NCERT p. 78).
• Methods of Redemption of Debentures chart — four boxes: Payment in Lump Sum / Payment in Instalments / Purchase in Open Market / Conversion into Shares or New Debentures (NCERT p. 110).
• Six terms-of-issue combinations table (six journal-entry forms in §2.8) — memorise which combinations require "Loss on Issue" vs only "Discount on Issue" (NCERT p. 97–99).
• Writing-off sequence — Securities Premium Reserve first, balance from Statement of Profit and Loss (Illustrations 16(b), 18, 20, NCERT p. 102, 107–108).

2.4 Common confusions / NTA trap points

• "Discount on Issue" vs "Loss on Issue". Discount on Issue is debited only when debentures are issued at a discount and redeemable at par. The moment they are redeemable at a premium, the entire discount + redemption premium go to Loss on Issue of Debentures — students routinely pick the wrong account head (NCERT §2.8 Note 1, p. 99).
• Premium on Redemption is a liability, not a reserve. It sits under Non-current Liabilities (Long-term Borrowings), not under Reserves and Surplus. Securities Premium Reserve goes under Reserves and Surplus (NCERT §2.8 Note 2, p. 99).
• Writing-off order. First Securities Premium Reserve, then Statement of P&L — not the other way round (NCERT §2.10, p. 106).
• Profit on cancellation of own debentures → Capital Reserve, not General Reserve or Statement of P&L (NCERT §2.13 + Test your Understanding II Q8, p. 130, 136).
• Excess of net assets over purchase consideration → Capital Reserve; excess of purchase consideration over net assets → Goodwill (NCERT Illustrations 11–12, p. 91–92).
• Issue of debentures at a discount is NOT prohibited by the Companies Act, 2013 — students often tick "True" for the statement that the maximum discount is 10% (it is actually False per Test your Understanding I Q3) (NCERT §2.4.2, p. 81; p. 109).
• Number of debentures issued for consideration other than cash = Purchase Consideration ÷ Issue Price per debenture (not face value). When issued at discount, divide by (Face − Discount); when at premium, by (Face + Premium) (NCERT Illustration 13 workings, p. 93).
• Interest on debentures is a charge — payable even at a loss; goes through Statement of P&L, not Appropriation (NCERT §2.9, p. 104).
• DRR exemptions. All-India FIs, banking companies, NBFCs, HFCs and listed companies are exempted from creating DRR — students often miss the exemption list (NCERT §2.11, p. 111).
• DRI 15% threshold. Computed on debentures maturing during the year ending 31 March of the next year, deposited on or before 30 April (NCERT §2.11, p. 111).
• Loss on Issue write-off period. Within 12 months → Other Current Assets; beyond 12 months → Other Non-Current Assets (NCERT §2.4.2, p. 81).

2.5 Journal entry templates

(a) Issue at par, redeemable at par (NCERT §2.4.1, p. 79)

(b) Issue at discount, redeemable at par (NCERT §2.4.2, p. 81)

(c) Issue at par, redeemable at premium (NCERT §2.8, p. 99)

(d) Issue at discount, redeemable at premium (NCERT Illus. 18, p. 107)

(e) Issue for consideration other than cash (NCERT §2.6, Illus. 13, p. 93)

(f) Writing off Loss on Issue — first Securities Premium then P&L (NCERT §2.10, p. 106)

(g) Interest on debentures with TDS (NCERT §2.9.1, p. 104)

(h) Redemption — at a premium (NCERT §2.12, p. 113)