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We can define redemption of debentures as the discharging of liabilities for the repayment of debentures to debenture holders. A debenture is an instrument of debt that is acknowledged by the company issuing the debenture and it contains the statement of the means through which the principal and the interest will be repaid. In most cases, the repayment of the amount takes place when the period of the bond expires. The repayment of the amount of the debentures has to comply with the terms set down in the debentures themselves.
Journal entries at the time of the redemption of debentures
Redemption of Debentures at Par
Debentures A/C Dr
To Debenture holder’s A/C
(Being debentures due for redemption)
Debenture holder’s 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 holder’s A/C
(Being debentures due for redemption at a premium)
Debenture holder’s A/C Dr
To Bank A/C
(Being amount paid on redemption)
Time of Redemption of Debentures
Debentures are usually redeemed when the time period for which they are issued expires. At the end of this time period, the company makes payment to the debenture holders according to the terms specified and agreed upon at the time of issuing the debentures.
Amount of redemption
The amount that is paid at the time of redemption is usually agreed upon at the time of issuing the debenture. This generally consists of the capital and the interest that the capital might earn. All these conditions are stated in the certificate of the debenture itself.
Debenture redemption reserve or DRR
A DRR or debenture redemption reserve is a provision that requires the formation of a reserve fund by any company that issues debentures. This is a safety measure for investors in case the company becomes a defaulter. This is an amendment made in the Indian Companies Act of 1956 and was done in the year 2000. According to the further guidelines issued in section 71(4) of the Companies Act, 2013 and the Securities and Exchange Board of India (SEBI) requires the creation of a DRR or debentures redemption reserve, which is equal to at least 25% of the total amount of the debentures issued by the company. In 2019 this limit was lowered to 10% of the total value of debentures. These limitations are placed so that the company cannot redeem the debentures completely out of its capital. The companies are required to redeem the debentures they issue from the profits they earn.
Conditions for the investment of 15% of debentures that are going to mature during the year. Rule 18 (7) (C) of the Companies Rule, 2014 any company that issues debentures will invest 15% of the total value of its debentures on or before the 30th day of April. This investment is made to be redeemed before the 31st of March of the next year.
Journal entries
For transfer of profit to Debenture Redemption Reserve
Surplus, i.e., Balance in Statement of Profit and Loss Dr
To Debenture Redemption Reserve A/C
(Being profit equal to 25% of debentures transferred to DRR)
For making investment or deposit in specified securities
Debenture Redemption Investment A/C Dr
To Bank A/C
(Being investment equal to 15% of debentures made in specified securities)
At the time of redemption for encashment of Investment
Bank A/C Dr
To Debenture Redemption Investment A/C
(Being investment encashed consequent upon redemption of debentures)
When all Debentures are redeemed
Debenture Redemption Reserve A/C Dr
To General Reserve A/C
(Being DRR transferred to General Reserve)
Conclusion
We can define redemption of debentures as the repayment of the debentures that are issued to debenture holders by the company. This repayment is done according to some pre-agreed upon conditions issued with the debentures. Companies that issue debentures are usually required to maintain debenture redemption reserves. This is done to ensure that the investors’ interests are safeguarded in the event of the company defaulting.
