REDEMPTION OF DEBENTURES

MEANING

Debenture: It is a document issued by a company under its common seal

acknowledging the debt and it also contains the terms of repayment of debt and
payment of interest at a specified rate.

Redemption of debentures means repayment of the due amount of debentures

holders. Its may be at par or at premium.

Time of Redemption
1. At maturity: When repayment is made at the date of maturity of
debentures which is determined at the time of issue of debentures.
2. Before maturity: If articles of association and terms of issue mentioned
in prospectus allows, then a company can redeem its debentures before
maturity date.
Redemption Methods
1. Redemption in Lump-sum: When redemption is made at the expiry of a
specific period, as per the terms of issue.
2. Redemption by draw of lots: In this method a certain proportion of
debentures are redeem each, year, the debenture for which repayment is
to be made is selected by draw of lots.
3. Redemption by purchases in open market: If articles of association of a
company authorize, it may purchases its own debentures from open
market i.e. stock exchange
SOURCES OF REDEMPTION

The sources of redemption of debentures are as follows

1. Proceeds from fresh issue of Share Capital or Debenture holder.

2. From accumulated profit.
3. Proceeds from sale of fixed assets.
4. A company may purchases its own debentures out of its surplus funds.

METHODS

There are several methods by which the redemption of debentures can take
place. Each method follows a unique accounting treatment. These approaches
can be classified under the following categories :

• Payment in lump-sum on the debenture’s maturity.

In such cases, the debenture is redeemed by the company in a lump-sum

amount as a one-time payment at the end of the maturity period. The
amount, as well as the maturity date, will be as per the terms discussed
during the issuance of the debenture.
As the company is aware of the date of maturity, they can prepare
their finances in advance. This one-time payment of such a lump-sum
amount also includes the funds set aside in the debenture’s redemption
reserve account.

• Payment in instalments after the maturity date.

In this method of redemption of debentures, repayment of the

borrowed funds takes place through a series of installments in a regular
 or irregular fashion as per the terms of the conditions of the
redemption of the said debenture.

• Redemption through the purchase of the debenture on the market.

In this case, companies and firms are willing to purchase their

debentures on the market. They can also choose to cancel them
immediately; in such a way, the company can prolong the maturity of the
debenture until the payment is suitable for its financial capabilities.
Moreover, if the purchase of the debentures on the open market is
made at a discount, the company can avail the opportunity of lowering
the overall redemption payment, thereby improving the overall business
revenue.

• Redemption through the conversion of debentures into new

debentures or equity shares.

Redeemable Debentures also offer the facility of conversion into a new

type of debenture or an equity share of the concerned company. The
terms and conditions of the conversion of such a debenture are
addressed to the holder during the issuance of the debenture.
This kind of debenture is termed as convertible debentures. Such
debentures are converted to new debentures, or equity shares can be
issued by the company at par, for discount and even at a specified
premium.
IMPORTANCE OF DRR AND DRI IN THE CONTEXT OF REDEMPTION OF
DEBENTURES

Debenture Redemption Reserve (DRR) is a fund preserved by companies that

have been used to make payments on debentures. So the company that issues
the Debenture must create a Debenture Redemption Reserve (DRR) to protect
their investors and minimize the risk in case of default in the payment.

When the debenture issuing company create a reserve for the process of
redemption of debentures then it is known as Debentures Redemption
Investment. Generally, the investment amount is at least 15% of the nominal
value of the debentures to be redeemed during the financial year. To create
DRR, there are some specific securities in which a company requires to invest
the amount.