Redemption of debentures refers to the repayment of debentures to debenture holders and the discharge of the company's liability arising from them. Generally, debentures are redeemed on the expiry of the period for which they were originally issued. However, a company may also redeem them before the maturity date if such redemption is permitted by its Articles of Association and the terms of issue. Early redemption can be carried out either through instalments or by purchasing the debentures from the open market.
Redemption of Debentures In Instalments by Drawing Lots:
Method in which a company redeems its debentures gradually in annual instalments instead of redeeming the entire amount at one time. Under this method, the company selects the debentures to be redeemed on a random basis through a draw of lots and repays the selected debenture holders accordingly. The debentures may be redeemed either at par or at a premium, depending on the terms of issue. As per SEBI regulations, the company is required to transfer an amount equal to 25% of the face value of the debentures issued from its profits to the Debenture Redemption Reserve (DRR) before redemption. This reserve helps ensure the availability of funds for the repayment of debentures.
Illustration 1:
Sukant Ltd. issued 12% Debentures of ₹1,80,000 payable in three annual instalments at par beginning from 31st March 2020. Pass the necessary journal entries if debentures are to be redeemed out of profit.
Solution:
Illustration 2:
On 1st April 2020, Sayeba Ltd. issued ₹1,00,000 15% Debentures of ₹100 each redeemable at a premium of 10% at the end of 2 years beginning from 31st March 2020. The company had in its Debenture Redemption Reserve Account a balance of ₹30,000. Pass the necessary journal entries both at the time of Issue and Redemption of Debentures without providing for the Interest and loss on issued Debentures. Investment, as required by law, was made in a fixed deposit of the bank.
Solution:
Note: DRR should be created of the 100% nominal value of the debentures to be redeemed because there is an existing DRR of more than 25% of the nominal value of the debentures to be redeemed.