Can the company purchase its own debentures?

Short Answer Questions · Q15

Q. Can the company purchase its own debentures?

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Concept understanding — Debenture Definition

Debentures: The Company's Way of Borrowing Money

Think of a debenture like this: you need ₹5,00,000 to expand your business. Instead of asking a bank for a loan, you go to the public and say, "Lend me money, and I'll pay you interest every year. After 5 years, I'll return your full amount." Each person who lends you money gets a certificate — that certificate is a debenture.

The Precise Meaning

A debenture is a written instrument issued by a company under its common seal, acknowledging a debt. It contains a promise to repay the borrowed amount at a specified date (maturity) and to pay interest at a fixed rate at regular intervals (usually half-yearly or yearly).

Note

A debenture holder is a creditor of the company, not an owner. They have no voting rights and no share in profits — only a fixed interest payment.

Why Debentures Matter

Companies issue debentures because:

They raise large funds without diluting ownership (unlike shares)
Interest paid on debentures is a tax-deductible expense (reduces taxable profit)
Debentures are safer for investors than shares (fixed return, priority in repayment)

For investors, debentures offer:

Fixed, predictable income
Higher safety than equity shares
Priority over shareholders if the company is liquidated

Accounting Treatment

When a company issues debentures, the journal entry is:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	[Amount received]
To Debentures A/c		[Face value]
To Securities Premium Reserve A/c (if issued at premium)		[Premium amount]
(Being debentures issued at premium)

Key points:

Debit Bank A/c with the actual amount received
Credit Debentures A/c with the face value (nominal value)
If issued at a premium (e.g., ₹100 debenture issued for ₹110), credit the extra ₹10 to Securities Premium Reserve A/c
If issued at a discount (e.g., ₹100 debenture issued for ₹95), debit the discount to Discount on Issue of Debentures A/c (a fictitious asset written off over the debenture's life)

Watch out

Never confuse debentures with shares. Debentures are liabilities (shown under "Non-Current Liabilities" in the Balance Sheet), while shares are equity (shown under "Shareholders' Funds").

Interest on Debentures

Interest is calculated as:

Interest = Face Value of Debentures × Rate of Interest × Time Period

For example, if a company issues ₹10,00,000 worth of 9% debentures, the annual interest is:

₹10,00,000 × 9% = ₹90,000 per year

The journal entry for interest payment:

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Yes, a company can purchase its own debentures in the open market, subject to the provisions of the Companies Act. Such purchase is treated as an investment (if held as stock-in-trade) or as cancellation (if redeemed). The accounting treatment depends on the intention: if held for trading, they are shown as current assets; if cancelled, the debenture liability is reduced.

Concept and Accounting Treatment

A debenture is a written instrument acknowledging a debt under the common seal of the company. It is a loan taken by the company from the public, carrying a fixed rate of interest. The company is the borrower, and the debenture holder is the lender.

When a company purchases its own debentures, it is essentially buying back its own debt. This is legally permitted under Section 68 of the Companies Act, 2013, provided the company is authorised by its Articles of Association and follows the prescribed procedure.

The accounting treatment depends on the intention behind the purchase:

If purchased for cancellation (redemption): The debentures are cancelled immediately. The entry is:
- Debit: Debentures Account (face value)
- Credit: Bank Account (purchase price)
- The difference between face value and purchase price is transferred to Capital Reserve (if purchased at a discount) or Debenture Redemption Reserve (if purchased at a premium).
If purchased as an investment (held for trading): The debentures are treated as current assets. The entry is:
- Debit: Investment in Own Debentures Account (cost)
- Credit: Bank Account (cost)
- These are shown under "Current Assets" in the Balance Sheet.

Watch out

A common mistake is to debit the Debentures Account when the debentures are purchased as an investment. Remember: only cancel the liability when you intend to redeem them. If held for trading, the liability remains outstanding.

Solution

Since the question does not specify the purpose of purchase, I will illustrate both scenarios with a hypothetical example.

Assumption: XYZ Ltd. has 10,000, 12% Debentures of ₹100 each outstanding. The company purchases 1,000 of its own debentures at ₹95 each (i.e., at a discount of 5%).

Scenario 1: Purchase for Cancellation

Journal Entry

Particulars	Debit (₹)	Credit (₹)
12% Debentures A/c Dr.	1,00,000
To Bank A/c		95,000
To Capital Reserve A/c		5,000
(Being 1,000 own debentures purchased at ₹95 each and cancelled)

Working Notes:

Face value of debentures purchased = 1,000 × ₹100 = ₹1,00,000
Purchase price = 1,000 × ₹95 = ₹95,000
Discount on purchase = ₹1,00,000 – ₹95,000 = ₹5,000 (credited to Capital Reserve)

Scenario 2: Purchase as Investment (Held for Trading)

Journal Entry

Particulars	Debit (₹)	Credit (₹)
Investment in Own Debentures A/c Dr.	95,000
To Bank A/c		95,000
(Being 1,000 own debentures purchased at ₹95 each as investment)

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Q.Can the company purchase its own debentures?

Concept and Accounting Treatment

Solution

Scenario 1: Purchase for Cancellation

Scenario 2: Purchase as Investment (Held for Trading)

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