Q.Explain the various methods by which a company may redeem its debentures.

A company's terms of issue generally fix, in advance, which of several possible redemption methods will apply to a given series of debentures.

Redemption of debentures means the repayment by the company of the amount borrowed under them, in accordance with the terms fixed at the time of issue, and Section 71(8) of the Companies Act, 2013 makes this a strict, binding obligation of the company rather than something left to its later convenience. The terms of issue themselves generally specify which of the following methods will apply.

The first and most common method is redemption in a lump sum, sometimes described as a bullet repayment: the company repays the entire face value of all the outstanding debentures of that series together, in a single payment, on the one maturity date fixed at the time of issue. This is straightforward to administer and gives both the company and its debenture-holders a single, clearly known date around which to plan.

The second method is redemption by instalments, under which the company spreads its repayment obligation over a period of years rather than concentrating it on one date. At each instalment date, only a specified proportion of the total debentures outstanding is redeemed — this can be done either by drawing lots among the numbered debentures, so that a randomly selected batch of certificates is redeemed at each round while the remaining holders continue to receive interest as before, or by redeeming a proportionate part of every holder's own holding at each instalment, so that every debenture-holder is repaid gradually and equally over time. This method reduces the size of any single repayment the company must fund, easing its cash-flow planning compared to a lump-sum redemption.

The third method is redemption by purchase in the open market: where the terms of issue and the company's own constitutional documents permit it, the company itself buys back its outstanding debentures directly from the market, typically doing so when they are trading below their face value, since this lets the company extinguish the debt for less than its full redemption value. Debentures purchased this way are usually cancelled, reducing the total amount the company must redeem at maturity, though, where its terms allow, the company may instead hold them as own debentures for possible reissue later rather than cancelling them outright. …