Redemption of Debentures

Redemption of debentures is the repayment, by the company, of the principal amount borrowed against the debentures, on or before the date agreed at the time of their issue, discharging the company's liability to its debenture-holders. Because redemption is a substantial cash outflow that a company can usually foresee well in advance (the redemption date being fixed at issue), the Maharashtra HSC Secretarial Practice syllabus treats redemption as something a well-run company plans for methodically, chiefly through the Debenture Redemption Reserve (DRR) discussed earlier, rather than something met out of whatever cash happens to be on hand when the date arrives.

A company may redeem its debentures by any of the following methods, and the terms of issue generally specify in advance which method will apply. Redemption in lump sum (also called redemption in one instalment, or redemption at maturity) is the simplest method: the company repays the entire amount of the debentures on the single date on which they mature, drawing on funds it has accumulated for the purpose (typically through the DRR) or, less prudently, out of fresh borrowing. Redemption by instalments spreads the repayment burden over several years instead of concentrating it on one date — the company redeems a part of the total debentures outstanding each year, usually by drawing lots (drawing by ballot) among the outstanding debentures to decide, fairly and impartially, which specific debentures fall due for repayment that year, so that no individual 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, into new debentures) of the company, at the ratio and after the period fixed at the time of issue, discharging its debt obligation not with cash but by admitting the erstwhile debenture-holder as a shareholder. Redemption by purchase in the open market allows a company, if its Articles of Association permit, to buy back its own debentures directly from the open market (through a recognised stock exchange) whenever the market price of the debenture is lower than its face value, at any time before the fixed redemption date — this can work out cheaper for the company than waiting to redeem at face value on the due date, and the company may then either cancel the debentures it has bought …