Redemption of Debentures

Redemption of debentures means the repayment, by the company, of the amount borrowed from debenture-holders, in accordance with the terms fixed at the time of issue. Because a debenture is a fixed liability of the company rather than a share of ownership, redemption is not optional in the way a share buy-back might be — the company is contractually bound, under Section 71(8) of the Companies Act, 2013, to pay interest and to redeem the debentures strictly according to the terms and conditions of their issue, and a failure to do so entitles the debenture-holder to approach the Tribunal for appropriate directions.

The procedure by which redemption is actually carried out can follow more than one method, and the terms of issue generally specify in advance which method (or combination) will apply. The first and most common method is redemption in a lump sum: the company repays the entire face value of the debentures to all the holders together, in one payment, on the single maturity date fixed at the time of issue — this is often called a "bullet" repayment because the whole obligation is discharged at one point in time rather than spread out. The second method is redemption by instalments, under which the company repays the debentures gradually over a period, redeeming only a specified proportion of the total outstanding debentures at each instalment date, either by drawing lots among the numbered debentures to decide which particular certificates are redeemed in that round, or by redeeming a proportionate part of everyone's holding — this method spreads the company's repayment burden over several years instead of concentrating it on a single maturity date. The third method is redemption by purchase in the open market: where the terms of issue and the company's constitutional documents permit it, the company itself buys back its own debentures from the open market, generally when they are trading below their face value, and either cancels the debentures so purchased (thereby reducing the total amount it must redeem later) or, where the terms allow, keeps them as "own debentures" for possible reissue. A fourth possibility, applicable only to convertible debentures, is redemption by conversion into equity shares of the company, at the ratio and on the date fixed under the terms approved by special resolution at the time of issue, in which case no cash repayment is made at all for the portion converted. …