Methods of Redemption of Debentures

The Redemption of debentures means the redeeming of instruments of debentures in the many ways possible. This process can be carried on by many ways, however there are no such guidelines mentioned in any companies act. The debentures so recovered by the debenture holders should be flexible as they are not limited to just the redemption of debenture, but it can go on to more than just what is stated.

The Redemption of debentures have to done on the basis of preliminary requirements. The basic requirement is the issuance of debentures by the company, a proper document of the recovery of the debentures is made at the time of the issuance. These are the guidelines that concern the investors. There are the following way or methods through which debentures can be redeemed:

Journal entries at the time of the redemption of debentures

Redemption of Debentures at Par

Debentures A/C                                        Dr

                To Debenture holders’ A/C

(Being debentures due for redemption)

Debenture holders’ A/C                           Dr 

                 To Bank A/C

(Being amount paid on redemption)

Redemption of Debentures at Premium

Debentures A/C                                                                   Dr

Premium on Redemption of Debentures A/C                   Dr

                              To Debenture holders’ A/C

(Being debentures due for redemption at premium)

Debenture holders’ A/C                                                       Dr

                              To Bank A/C

(Being amount paid on redemption)

1. Payment in Lump Sum

Payment in lump sum the method in which a huge sum of small instalments that is paid in one time the debentures at the end of each year amount to a certain amount of money, instead of paying these in instalments these are paid in one go by the simple method of lump sum method. This is done on a date that is fixed on the issuance of the debenture. In the process of redemption of debentures, the payment made in one time is known as the payment of lumpsum. The amount that is payable is the principal amount issued by the company to its debenture holders.

2. Payment in instalments

The payment of instalments is done once annually. The value that is evaluated at the end of a year of debentures owed to an investor. The instalments are made once in a year to the debenture holder on a date that is fixed on the day of the issuance of the debenture. The number of payments and instalments depend on the number of years that the instalments have been invested for. Take for example, a debenture is issued for 15 years it can be paid in 15 instalments.

3. Purchased redemption in the open market

One of the objectives of issuing debentures is safe guarding the interest of the debenture holders. In order to do that an accumulated reserve of, 25 percent of the debentures calculated at the end of each year is made. This objective is mentioned in the Companies Act 2013. This reserve is to be released at the day of maturity of the debenture. This reserve is also called the sinking fund.

4. Conversion into Shares and New Debentures

The ordinary equity share of a company are the permanent shares that are present in the shares of the company. These shares make a percent of the company’s capital. The provision in the company to convert the debentures into equity share and new debentures. 

5. Call Option and put Options

The companies that issue debentures help the debenture holders to have the provision of calling in or putting it out for the sale. The company buys these on the assigned on the basis that are agreed when they were issued. These functions are known for the redemption of the debentures.

Conclusion

The redemption of debentures is subjected to the market changes. The merits and demerits of the withdrawal and investment in a company. The investors should be very cautious while reading the terms and conditions of the debenture issuance.