Chapter 3

DEBENTURES

MEANING OF DEBENTURES

Debenture may be defined as a certificate issued by a

company under its seal acknowledging debt due by it to its
holder. The most essential characteristic of a debenture is
the admission or record of indebtedness.

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 CLASSIFICATION OF DEBENTURES

From the Point of View of Security

• Naked debentures

• Mortgage or secured debentures

From the Point of View of Redemption

• Redeemable debentures

• Irredeemable debentures
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CLASSIFICATION OF DEBENTURES (contd…)

From the Point of View of Convertibility

• Convertible debentures

• Non-convertible debentures

From the Point of View of Transferability

• Registered debentures

• Bearer debentures

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 DIFFERENT TERMS OF ISSUE OF DEBENTURES

A company may issue debentures on different terms.

 Debentures issued at par and payable at par

 Debentures issued at discount and payable at par
 Debentures issued at premium payable at par
 Debentures issued at par, payable at premium
 Debentures issued at discount, payable at premium

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DIFFERENT TERMS OF ISSUE OF DEBENTURES (contd…)

 Debentures issued at par and payable at discount

 Debentures issued at discount and redeemable at discount
 Debentures issued at premium and redeemable at discount
 Debentures issued at premium and payable at premium
 Debentures issued as collateral security

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 WRITING OFF LOSS ON ISSUE OF
DEBENTURES

The loss on issue of debentures (e.g., discount on issue of debentures

or premium payable on redemption etc.) appears on the ‘Assets side’ of
the Balance Sheet. However, it is a fictitious asset which must be
written off as soon as possible. The loss can be written off from any
capital profit (including securities premium) or revenue profit.

It is to be noted that writing off loss on issue of debentures is not a

legal necessity. However, sound financial principles require that such
loss should be written off as soon as possible but in any case before
the debentures are completely redeemed.

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 WRITING OFF LOSS ON ISSUE OF DEBENTURES (contd…)

In case such loss is written off from Profit & Loss Account as a deferred
revenue expenditure, the amount to be written off each year will be
calculated as follows:
1.Where debentures are to be redeemed after a fixed period The
amount of loss or discount on issue of debentures is written off evenly
over the years after which the debentures will be redeemed.

2.Where the debentures are to be redeemed in instalments The

funds for use each year go on diminishing and therefore the loss on
issue of debentures is also divided over different years in the ratio of
amount of debentures outstanding at the beginning of each year.

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 REDEMPTION OF DEBENTURES

 Redemption in Instalments
 Redemption of a fixed sum of debentures

A company may adopt any of the following two options for

redeeming debentures of a fixed sum:
(i)Redemption out of profits.
(ii) Redemption out of capital.
(iii) Conversion of debentures to be redeemed into new
debentures or shares.

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(iv) Issue of new shares or debentures.

 Redemption by purchase of debentures in the open market

(i) Profit or loss on debentures purchased

(ii) Cum-interest and ex-interest purchase
(iii) Purchase of debentures for cancellation
(iv) Purchase of debentures as an investment

(contd…)

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(contd…)
 Redemption in a Lump Sum after the Expiry of a
Fixed Period
There can be two alternative methods of such provision:
(i)Creation of Sinking Fund or Debenture Redemption Fund.
(ii) Taking of an Insurance Policy.

 Sinking Fund Method

The sinking fund can also be of two types:
(i)Cumulative Sinking Fund
(ii) Non-Cumulative Sinking Fund

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