Deepak mahamiya

Redemption of debenture

 Meaning :- redemption of debenture means repayment of the amount o debenture to the

debenture holder
 DRR= 25% of FV (minimum requirement)-for only Non convertible portion-
SPL a/c Dr
To DRR a/c
 Minimum investment requirement 15 % of FV to be redeemed during the year on or before 30th
April of the year-
Deb. Redemption investment a/c Dr
To bank a/c

Securities of exchang board of India (SEBI) have provided some guideline for redemption of
debentures. The focal point of these guidelines is:
 Every company shall create debenture redemption reserve in case of issue of debenture
redeemable after a period of more than 18 month from the date of issue.
 The creation of debenture redemption reserve is obligatory only for non- convertible
debentures and non-convertible portion of patty convertible debentures.
 A company shall create debenture redemption reserve equivalent to at least 25 % of the
amount of debenture issue before starting the redemption of debenture.
 Withdrawal from debenture redemption reserve is permissible only after 10% of the debenture
liability has already been reduced by the company.
SEBI guidelines would not apply under the following situations:
 Infrastructure company (a company wholly engaged in the business of developing, maintaining
and operating infrastructure facilities), and
 A company issuing debentures with a maturity Period of not more than 18 month.

 Source of finance for redemption

Out of DRR Reason

1. Fresh issue (fully) 0% Enough cash available but this condition not
happing really because company act
restricted

2. Out of profit 100 % Due to enough profit

3. Partly out of profit partly 25 % Due to SEBI requirement

fresh issue
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 Deepak mahamiya

 DRR Rule applicable on companies

 Types of company   DRR

 All India financial Institute  Public + Private  No DRR

regulated by RBI & banking
company
 NBFC/LIC/UTI  Public company  25 % of FV

 Private company  `No DRR

 OTHER (including MFG. &  Public + Private  25 %

infrastructure company)

Rule for red. Of deb. Up to 2012

SEBI DRR at least 50 % sec 71 (4) gives –power to central govt. crate rule

Company act 1956 – silent 2014- 18(7)

Rule 1. 25 % DRR (minimum of FV)
2. Banking comp. all India F.I. Exempt
3. At least 15 % of face value investment
30 April of during redemption year

2010 2015 2016

31 march
Issue 31 March 30 April redemption
12 % debenture SPL (10L x 25%) 250k DRI a/c Dr 1. Sale of DRI
FV Rs. 100 To DRR a/c To bank a/c Bank a/c dr
IP Rs. 100 To DRI a/c
1. Bank a/c dr 2. Bank a/c dr
To deb. App. a/c To Int on DRI a/c
2. deb. App. Dr 3.12 % deb. a/c dr
To 12 % debenture a/c To deb. Holder a/c
4. Deb. Holder a/c Dr
To bank a/c
2

5. DRR a/c dr
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To G/R a/c
Deepak mahamiya

2015-16

2015 2016

D- DRR create (at least 25% of FV of S- sale of Investment

Deb. To be redeemed) 1. Sale 2. Interest recd.
I- Purchases Investment I – interest paid on debenture
R- Redemption of deb.
1. Due 2. Paid
G. DRR transfer to GR
DRR a/c dr
To GR a/c

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Deepak mahamiya

 Payment in one lump sum

1. Redemption out accumulated profit
a. By create sinking fund/debenture redemption fund
i. Cumulative sinking fund
ii. Non-cumulative sinking fund
b. By deb. Redemption fund policy
2. By issue of New Deb. Or share /out of capital
 Annual drawings /DRR create
 Purchases in open market
1. Purchases for cancellation
2. Purchase as investment
a) For cancellation
b) For resale

 Conversion in new shares or Debentures

1. Redemption out of capital
If at the time of redemption, adequate profits are not transferred from surplus account to the
debenture redemption reserve account, such redemption is said to be out of capital. When the
amount of debentures to be redeemed is small, this method of redemption out of capital is
followed. Whenever the liquid position of the company permits, the debenture holders are
given due notice in accordance with the terms of redemption and repayment is made the
company may issue new shares or debentures for making arrangement of funds for redemption.
Journal entries regarding issue of shares and debentures will be passed as earlier Note in Issue
of debenture

The journal entries are for redemption recorded as given below:

Issue of share and debenture for making arrangement of funds for redemption

Bank a/c Dr
To share capital / debenture a/c
To security premium a/c
(Share or debenture issue for the arrangement of fund for redemption)
(i) Redemption at par
Debentures a/c Dr (Face value)
To bank a/c
(Debentures redeemed at par)

(ii) Redemption at premium

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Debentures a/c Dr (face value of debenture)

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Premium on redemption of debentures a/c Dr (premium payable on red.)

Deepak mahamiya

To bank a/c
(Debentures redeemed at premium)
SPL / security prem. a/c Dr (with the amount of premium on red.)
To Premium on redemption of debentures a/c
(Premium on redemption of debentures written off)

(iii) Redemption at discount

Debentures a/c Dr (Face value)
To bank a/c
To profit on redemption of debenture a/c
(Debentures redeemed at discount)
Profit on redemption of debenture a/c Dr
To capital reserve a/c
(Profit on redemption transferred)
Note:-

1. According to section 52(3) of the companies Act, 2013 provides that such class of companies
as may be prescribed whose financial statements comply with accounting standards prescribed
for such class of companies’ u/s 133 of the 2013 Act cannot utilize Securities premium account
for providing premium payable on redemption of any redeemable preference shares or
debentures.
2. In view of section 71(4) of the companies Act, 2013 and SEBI guidelines restricts
redemption of debentures out of capital by requiring every company (except All India financial
institute and banking companies) to create a debenture redemption reserve (DRR) equivalent
to at least 25 % of the face value of the debentures issued before starting the redemption of
debentures out of profit available for dividend.
3. When debenture redeemed out of capital then at least 25 % of debentures issued will be
required to transfer to debenture redemption reserve out of profits available for dividend
because complete redemption out of capital is not permitted as per SEBI’s guideline.

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Deepak mahamiya

Redemption out accumulated profit

1. Redemption of debenture by creating sinking fund:

When the debentures are issued for specified period of time, their repayments have to be made
after the expiry of that specified period of time. For the redemption of debentures in one lump
sum after the expiry of specified period, the company needs a huge amount of money to pay off
debenture holders. If proper provision for redemption is not made, then there will be a strain on
working capital and the company may face liquidity crisis.
For collecting funds for redemption of debentures, a sinking fund is created by making a charge
against divisible profits. Every year an equal amount is debited to surplus account and
simultaneously credited to sinking fund account. The amount so appropriated is invested
outside the business marketable, on the other hand, if the amount so appropriated is used in
the business itself, it is called ‘’Reserve for redemption of debenture’’ instead of debenture
redemption fund or sinking fund for redemption of debenture, sinking fund may be of the
following two types
(i) Cumulative sinking fund: When the amount appropriated is allowed to accumulate at a
compound interest, so as to generate the amount required to redeem debentures on
the date of redemption, it is called cumulative sinking fund.
ykHk gkfu [kkrs ls izfro’kZ ,d fuf”pr jkf”k O;kikj ds ckgj izfrHkwfr;ks esa fofu;ksftr djus ds lkFk&lkFk mu
ij C;kt Hkh iwUk% fofu;ksftr dj fn;k tkrk gS rks ,sls “kks/ku dks’k dks lap;h “kks/ku dks’k dgrs gSA lap;h
“kks/ku dks’k vkf/kD; ls izfro’kZ vUrfjr dh tkus okyh jkf”k “kks/ku dks’k lkj.kh ls Kkr dh tkrh gS
 The amount to be appropriated every year out of profits is computed with the
help of sinking fund tables. On the date of redemption total amount invested at
compound rate of interest should be equal to the amount required for payment;
this amount is ascertained from annuity table.
 This amount will be appropriated every year by debiting SPL and simultaneously
crediting sinking fund account
 The amount so appropriated is invested in marketable securities every year by
debiting sinking fund investment a/c and crediting cash or bank a/c
 Interest received on such investments is credited to sinking fund a/c and again
re-invested.
 In this manner the amount will be accumulated at compound rate of interest to
generate the required amount at the end of specified period.
 At the time of redemption, sinking fund investment will be realized.
 The profit or loss on sale of aforesaid investment will be realized.
 The profit or loss on sale of aforesaid investment is transferred to sinking fund
account
 The debenture holder will be paid off from the amount.
 After redemption of debenture the balance in sinking fund account shall be
transferred to general reserve account
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Deepak mahamiya

Presentation in balance sheet: sinking fund account will appear under the head “reserve
and surplus” in the balance sheet till the redemption of debentures take place. Sinking
fund investment account will be appear under the head ‘’ Non-current investments’’ the
balance sheet till its realisation.
Journal entries:
At the end of first year:
i. Amount to be appropriated annually out of profit
Surplus a/c Dr (by annual fixed installment)
To debentures sinking fund a/c
(Annual sum transferred to debenture sinking fund a/c)
ii. Amount to be invested:
Debenture sinking fund investment a/c (amount appropriated)
To bank a/c
(Amount of sinking fund invested in securities)
After first year/years:
i. Annual installment to be appropriated:
Surplus a/c Dr (by fixed annual installment)
To debentures sinking fund a/c
(Annual sum transferred to debenture sinking fund a/c )
ii. Interest on investment :
Bank a/c Dr (Amount of int. recd. On S.F. investment)
To debenture Sinking fund a/c
(Interest received on sinking fund investments)
iii. Amount to be invested:
Debenture sinking fund investment a/c
To bank a/c
(Amount of sinking fund invested in securities
Last year (when debentures are to be redeemed)
i. Interest of accumulated investment received
Bank a/c Dr
To DSF a/c
(Interest received on sinking fund investments)
ii. Transfer of annual installment
Surplus a/c Dr (by fixed annual installment)
To debentures sinking fund a/c
(Annual sum transferred to debentures sinking fund a/c)
iii. Sale of sinking fund investments:
Bank a/c Dr
To DSFI a/c
(Debenture sinking fund investment sold)
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iv. Profit on sale of investment:

Deepak mahamiya

DSFI a/c Dr
To DSF a/c
(Profit on sale of Investments transfer to DSF a/c)

Or
Loss on sale of investments:
DSF a/c Dr
DSFI a/c
(Loss on sale of Investments transfer to DSF a/c)
v. Redemption of debentures:
Debenture a/c Dr
To bank a/c
(Debentures redeemed at par)
vi. Balance of sinking fund transferred:
Debenture sinking fund a/c Dr
To general reserve a/c
(Balance of debenture sinking fund a/c transferred to general reserve a/c)

(ii) Non Cumulative sinking fund: When the amount appropriated is disallowed to
accumulate at a compound interest, so as to generate the amount required to redeem
debentures on the date of redemption, it is called cumulative sinking fund.
vlap;h “kks/ku dks’k esa dsoy vkf/kD; ls vUrfjr dh tkus okyh jkf”k gh fofu;ksftr dh tkrh gS ml ij
vftZr C;kt ughA fofu;ksxks ij izkIr C;kt dks ykHk&gkfu fooj.k es tek dj fn;k tkrk gSA
2. By Debenture redemption fund policy:
This method is similar to that of sinking fund method. Instead of investing money in securities,
the amount is used in paying premium for the policy taken out with an insurance company. The
policy shall mature just before the date of redemption of debentures the amount received from
insurance company is used in paying to the debenture holders. Thus, debenture redemption
fund policy account is maintained in place of sinking fund investment account.

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Deepak mahamiya

3. Redemption by annual drawings or redemption of debenture in installments by

draw of lots
In accordance with the conditions of the issue, if debentures are to be redeemed by annual
drawing, the debentures for redemption are selected by lottery or drawings.
So redemption entries –
Debenture a/c Dr (Face value)
To debenture holder a/c
(due by draw of lots)
Debenture holder a/c Dr
To bank a/c
(actual payment to deb. holder)
Note:-
1. A company shall create DRR u/s 71(4) of the Companies Act 2013 and SEBI guidelines,
equivalent to at least 25 % of the face value of the debentures issued before starting the
redemption of debentures under this method also
2. Section 71(4) of the companies Act, 2013EBI guidelines and Rule 18(7) of the companies
(share capital and debenture) Rule, 2015, requires that a company should invest at least
15% of the face value of debentures to redeemed by 31St march of next year in specified
securities by 30th April of current year. Therefore, the company has made investment on
30th April for first installment and it remains invested till the last installment..

4. Redemption of debenture by conversion:-

Redemption by conversion means redeeming the debentures by converting them into new class
of debentures or shares. However, the debenture holders would exercise their right of conversion only
when they find it beneficial from their viewpoint or as agreed as per terms of issue, the new 2nd
debentures can be issued at par, premium or discount. In case of conversion of debentures (which were
originally issued at a discount) into shares, the actual amount realized from debentures at the time of
issue, should be used as the basis for determining the number of shares to be issued otherwise it would
amount to an issue of shares at discount without complying with the provisions of sec. 53 of the
Company Act, 2013. Thus, discount on issue of debentures a/c should be credited with the amount of
discount originally allowed, at the time of making due the amount payable to debenture-holder. The
following entries are passed:
_.ki=ks dks fuxZfer djrs le; fhg dqN dEifu;k _.ki=/kfj;ks dks fodYi nsrh gS ffd ;fn os pkgs rks vius _.ki=ks ds cnys es
dEiuh ds va”k ys ldrs gSA nl fodYi dk YkkHk ;g gksrk gS fd izkjEHk es _.ki=/kkjh ,d lqjf{kr _.knkrk ds #i es izos”k djrs
gS vkSj dEiuh dh vkfFkZd fLFkfr lqn<` gks tkus ij va”k/kkjh cu tkr gSA bl lqfo/kk dk ykHk mBkus okys _.ki=/kkjh;ks dks u;s
lerk ;k iwokZf/kdkj va”k ;k _.ki= fuxZfer dj fn,m tkrs gS u;s va”k ;k _.ki= leewY; ij ;k izhfe;e ij ;k cV~Vs ij
fuxZeu fd, tk ldrs gSA tks _.ki=/kkjh bl lqfo/kk dk ykHk ugh mBkuk pkgrs gS mudk udn es Hkqxrku dj fn;k tkrk gSA
;fn ,sls _.ki=, ftUgs] ewyRk% cV~Vs ij fuxZfer fd;k x;k Fkk] dk vc va”kks es ifjorZu fd; tk jgk gS rks fuxZeu ds le;
izkIr okLrfod jkf”k dks gh va”ksk dh la[;k Kkr djus esa iz;qDr fd;k tkuk pkfg, vU;Fkk ;g fuxZeu va”kks dk cV~Vs ekuk tk;sxk
tls dEiuh vf/kfu;e] 2013 dh /kkjk 53 ds izo/kkuks dk mYya?ku ekuk tk;sxkA bl izdkj _.ki=/kkfj;ks dks ns; jkf”k dh izfof’V
9

dk ns; jkf”k dh izfof’V djrs le; _.ki=ks ds fuxZeu ij cV~Vk [kkrs dks dzfs MV fd;k tk;sxkA
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Deepak mahamiya

Journal entries
(Old) debenture a/c Dr (face value of debenture)
Premium on Redemption of debenture a/c Dr (If any)
To debenture holders a/c
(Transfer of the balance of debentures a/c to debenture-holders a/c on conversion)

Note:- If debentures are originally issued at discount, at the time of making due the amount payable ot
debenture holders, following entry will be passed: ;fn _.ki=ks dk ewYkr% cV~Vs ij fuxZfer fd;k x;k Fkk] dk vc
va”kks es ifjorZui fd;k tk jgk gS rks fuEu izfof’V gksxh%
(Old) debenture a/c Dr (face value of debeantures)
To Discount on issue of debenture a/c
To debenture holders a/c
(Being amount due to debenture holders on conversion, which originally issued at discount)

Conversion at Par
Debenture holders a/c Dr
To share capital a/c (equity OR preference)
OR
To new debenture a/c
OR
To bank a/c
(Debenture converted and paid off at par)
Conversion At Premium
Debenture holders a/c Dr
To share capital a/c (equity or preference)
OR
To new debenture a/c
OR
To securities premium a/c
(Debenture converted into shares and new debentures at premium)
Conversion At Discount
Debenture holders a/c Dr
Discount on issue of debenture a/c Dr
To share capital a/c (equity or preference)
OR
To new debenture a/c
(Debenture converted and paid off at par)
Note:- debenture redemption reserve (DRR) is not to be created for convertible debentures and
convertible part of partly convertible debentures, In case of partly convertible debentures, DRR is
10

created only of Noon convertible part of the debentures.

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Deepak mahamiya

ifjoRkZuh; _.ki=ks rFkk vkaf”kd :Ik esa ifjorZuh; fgLls ds fy, _.ki= “kks/ku lap; (DRR) ds fuekZ.k djus dh vko”;drk ugh
gSA vkaf”kd :i ls ifjorZuh; _.ki=ks dh n”kk es xSj ifjorZuh; fgLls ds fy, _.ki= “kks/ku lap; dk fuekZ.k djuk vko”;d gS
&/kkjk 71¼4½

_.ki=ks dk “kks/ku frfFk ls iwoZ “kks/ku djkus dk _.ki=/kkfj;ks dks fodYi

Put option Or call option to debenture holders of redempotion of debenture before redemption date
_.ki=ks ds fuxZeu dh “krksZ es dEiuh _.ki=/kkfj;ks dk ;g fodYi ns ldrh gS fd os ;fn pkgs rks “kks/ku frfFk ls iwOkZ vius
_.ki=ks dk “kks/ku djk ys A bl rjg ds “kks/ku ds fodYi dks put option dgrs gSA bl fodYi ds vk/kkj ij _.ki=/kkjh iwoZ
fuf”pr vof/k ds Hkhrj ;k i”pkr dHkh Hkh vius _.ki= dk “kks/ku djk ldrs gSA
It may be given in the terms of redemption of debentures that if the company desires to redeem the
debentures before maturity date it can redeem at a prefix price. This type of option is known as ‘call
option’, Company uses such type of option when it thinks that there will be ample liquid resource in the
future will the company or interest rate may come down in the future

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Deepak mahamiya

Redemption of debentures by purchasing from the open market

;fn _.ki=ks dk [kqys cktkj es dz; }kjk 'kks/ku fd;k tkrk gS rks ;g eku fy;k tkrk gS fd jn~n djus ds fy, _.ki= dz; dkus
ls iwoZ dEiuh ds ikl _.ki= 'kks/ku lap; es i;kZIr 'ks"k miyC/k gSA vr% tc rd bl i)fr esa DRR cukus ds fy, Li"V #i ls
funs’Z k u fn;k tk;s rc rd _.ki= 'kks/ku lap; cukus dh vko’;d ugh gSA ;g Hkh eku fy;k tkrk gS fd _.ki=ksa fd 15
izfr’kr jkf’k igys gh foufu;ksftr dj nh xbZ gSA vr% fou;ksx djus dh vko’;drk ugh gSA

Redemption of deb. By purchases in open market

1. Direct cancellation (indirect redemption)

2. For investment in deb. (own deb.)
a. For resale
b. For cancellation
1. Journal entries for Direct cancellation (indirect redemption)
Debenture a/c Dr
To bank a/c
To profit on redemption of debentures a/c
(... Own debenture of Rs…each cancelled by purchases in the open market at Rs… each)

Profit on redemption or cancellation of debenture is a capital Profit. As such it is transferred to capital

reserve account. The following entry is passed:

Profit on redemption of debenture a/c Dr

To capital reserve a/c
(Profit on redemption of debentures transferred to capital reserve a/c)
If there is any loss on cancellation, then following entry is passed:
SPL Dr
To loss on redemption of debentures a/c
(Being loss on redemption of debentures transferred to SPL)

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 Deepak mahamiya

 If own debentures of the company are purchased on the dates other than the date of interest payment,
adjustment for interest is also required to be made.
1. In case of cum-interest purchases of debentures, the purchase price also includes the amount of interest
from the last date of interest payment to the date of purchases.
2. In case of ex- interest purchases, the aforesaid amount of interest is not included in the purchases price.

Journal entries

Cum -interest Ex-interest

%debenture a/c Dr (face value) %debenture a/c Dr (face value)

Debenture interest a/c Dr(o/s interest) Debenture interest a/c Dr(o/s interest)
To bank a/c (purchase Price including interest) To bank a/c (purchase Price +o/s interest)
To profit on redemption of debenture a/c To profit on redemption of debenture a/c (discount)
(interest + discount)

1. Purchases of company’s own debenture for investment in deb. (own deb.)

When adequate additional funds are accumulated in the company, which are not deployed
profitably, the company may purchase its own debentures so that the interest payable on such
debentures may be saved. The decision will be taken by the company if its debentures are
available in open market at discount. The following journal entry is passed for this purchase:
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Deepak mahamiya

Journal entries

1. Debenture purchase entry

Own debentures a/c Dr (with the purchase price)

To bank a/c
(Own debentures purchases as investment)

When debentures are purchased on the date other than the date of interest payment, the adjustment
for interest is required to be made.

Own debentures a/c Dr (Actual purchase price)

Interest on Own debentures a/c Dr (Amount of interest)
To bank a/c
((Own debentures purchases as investment)

2. Resale of own debentures kept for investment after some time:

Bank a/c Dr
To Own debentures a/c
To interest on Own debentures a/c
To Profit on resale of Own deb. a/c
(Own debentures sold at profit)

IMP:- Profit on resale of Own debentures will be transferred to SPL Or General reserve a/c the
journal entry will be:
Profit on resale of Own Debenture a /c Dr
To SPL /General Reserve a/c
(Transfer entry made)
Resale of own debentures at a loss
Bank a/c Dr actual sale
Loss on resale of Own debentures a/c Dr
To own debentures a/c
To interest on Own debentures a/c
(Own debentures sold at Loss)
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IMP:- Loss on resale of Own debentures will be transferred to SPL Or General reserve a/c the journal
entry will be:
SPL /General Reserve a/c Dr
To Loss on resale of Own debentures a/c
(Transfer entry made)

OR
When debenture is used for cancellation, the journal entry will be:
(i) Profit on cancellation
Debenture a/c Dr (Face value of debentures)
To own debenture a/c (purchases price)
To Profit on cancellation of Own Debentures a/c (Amount of profit)
(Debenture cancelled at profit)
The profit on cancellation will be transferred to capital Reserve. The journal entry will be:
Profit on cancellation of own debenture a/c Dr
To capital reserve a/c
(Transfer entry made)
(ii) Loss on cancellation:
Debentures a/c Dr (face value of debentures)
Loss on cancellation Dr (Amount of loss)
To Own debenture a/c (Amount invested)
(Own debentures cancelled at loss)
Note: Loss on cancellation of debentures is capital loss. It may be written off either against capital
profits or against revenue profits. The journal entry will be:

SPL / capital reserve a/c Dr

To loss on cancellation of own debentures a/c
(Being loss on cancellation of own debentures transferred to SPL or capital reserve a/c)

If the company has balance of own debentures as investment on the date of interest payment, the
following entry is passed for the amount due on the balance of own debentures:

(i) Debenture interest a/c Dr (amount of interest on own debentures)

Interest on own debentures a/c
(being interest accrued on own debentures)
(ii) Interest on own debentures a/c Dr (amount of int. on own deb.)
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To SPL
(Being interest on own deb. Transferred to SPL)
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Deepak mahamiya

(iii) SPL a/c Dr

To debenture interest a/c
(Being interest on debentur4es transferred to SPL)

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