Redemption of Debentures

• DRR is a reserve created out of profits for redeeming debentures. According to section 74(4) of the Company’s Act, 2013 and Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014, a Company is required to transfer an amount equal to at least 25% of the value of debentures to the Debenture Redemption Reserve a/c before redemption of debentures.

• As per Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014, at least 15% of the nominal value of the debentures to be redeemed during the year should be invested on or before 30th April of the year in which the redemption is to be made.

• All India Financial Institutions (AIFIs) regulated by RBI
• Banking Companies

• Shown in the Equity and Liability part of the Balance Sheet under the head ‘Shareholders’ fund and sub-head ‘Reserves and Surplus’.

• When all the debentures are redeemed, DRR Account is closed by transferring the amount to General Reserve.

• From the proceeds of fresh issue of shares or debentures
• Out of capital that is a redemption of debentures without the utilisation of any profits of the company. It is possible only in case of AIFIs and Banking companies as these are exempted from creating DRR
• Out of profits: if a company retains a part of divisible profits every year and utilises it for the purpose of redemption of debentures.

• By Lump-sum Payment: under this method, the company redeems the debentures by paying the whole amount at once that is lump-sum
• In Instalments through a draw of lots: under this method, debentures are redeemed in instalments and debentures to be redeemed are selected by draw.
• By purchase from open market: Under this method, the company purchases its own debentures through stock exchanges for the purposes of cancellation

• When the total amount of debentures is paid to the debenture holders in lump-sum on maturity or even before maturity, it is known as Redemption of debentures in lump-sum.
• In this case, the time of repayment is known in advance and the company can plan its financial resources accordingly

To Debenture Redemption Reserve A/c               *****

To Bank A/c                                                                 *****

Debentures A/c                                                       Dr. *****

To Debenture holders A/c                                           *****

b) If debentures are redeemed at Premium:

Debentures A/c                                                        Dr. *****

Premium on Redemption of Debentures A/c     Dr. *****

To Debenture holders A/c                                              *****

To Debenture Redemption Reserve A/c                   *****

To Bank A/c                                                                    *****

To General Reserve A/c                                              *****

• Under this method, the debentures are redeemed in lots or instalments from one particular year provided it agrees with the terms of issue of debentures.

• Under this method, the debentures are redeemed by converting them into new class debentures or shares.
• At the time of conversion, new shares or debentures can be issued at par or at a premium or at a discount

Discount on issue of shares/debentures Dr. (with the amount of discount)

To Share Capital/Debentures(new) (with face value of new shares or debentures issued)

To Securities Premium (with the amount if securities premium)

• When a company purchases its own debentures through stock exchanges for the purpose of cancellation such an act of purchasing and cancellation is known as Redemption Of Debentures By purchasing them in the Open Market

Own Debentures A/c (with purchase cost)                    Dr.

To Bank A/c

(ii) On Cancellation of Own Debentures:

….%Debentures A/c                                                            Dr.

To Own Debentures A/c

Own Debentures A/c (with purchase cost)                 Dr.

To Bank A/c

(ii) On Cancellation of Own Debentures:

….%Debentures A/c                                                          Dr.

To Own Debentures A/c

To Gain or Profit on Cancellation of Own Debentures A/c

(iii) On transfer of profit on cancellation of debentures

Gain or Profit on Cancellation of Own Debentures A/c                       Dr.

To Capital Reserve A/c

b. Drawing lots

c. Purchase from open market

d. All of the above

b. Premium

c. Either (a)&(b)

d. Both (a)&(b)