Q.Explain the various methods of redemption of debentures.

A company almost always knows the redemption date well in advance, so the method it chooses to actually repay is a genuine, planned decision, not an emergency response.

Redemption of debentures is the company's repayment of the principal amount borrowed against them, discharging its liability to the debenture-holders on or before the agreed date. Because the redemption date is fixed at issue and therefore foreseeable well in advance, a well-run company plans methodically for it, chiefly through the Debenture Redemption Reserve (DRR) built up out of profit over the debentures' life, rather than scrambling for cash when the date arrives.

Redemption in lump sum (or in one instalment, at maturity) is the simplest method: the company repays the entire amount on the single date the debentures mature, drawing on funds accumulated for the purpose, typically through the DRR. Redemption by instalments spreads the repayment burden over several years instead, with the company redeeming a portion of the outstanding debentures each year — the specific debentures due for repayment in a given year are often chosen by drawing lots (drawing by ballot), so that no holder can claim to have been unfairly singled out either way. Redemption by conversion applies specifically to convertible debentures: instead of paying cash, the company converts the debentures into equity shares (or, occasionally, new debentures) at the ratio and after the period fixed at issue, discharging the debt by admitting the erstwhile debenture-holder as a shareholder rather than repaying in cash. Redemption by purchase in the open market lets a company, where its Articles of Association permit, buy back its own debentures directly from the market through a recognised stock exchange, typically when the market …

Students sometimes assume 'redemption by conversion' applies to every debenture; it applies only where the debenture was issued as a convertible debenture in the first place. Another slip is describing open-market purchase as available to eve …