Redemption of Debentures

Redemption of debentures means the repayment of the amount borrowed from debenture holders, according to the terms of issue. It may be carried out by:

• Payment in lump sum on the maturity date stated at the time of issue.
• Payment in instalments, often decided by a draw of lots among the debentures outstanding.
• Purchase of the company's own debentures in the open market, either for immediate cancellation or as an investment.
• Conversion into new shares or new debentures, at the holder's option, as per the original terms of issue.

Redemption may be financed out of profits or out of capital. Where debentures are redeemed out of profits, the company is required (subject to the applicable Companies (Share Capital and Debentures) Rules) to set aside an amount out of its distributable profits into a Debenture Redemption Reserve (DRR) before redemption, so that dividend cannot be paid out of the very funds needed to protect debenture holders. Once the related debentures have been fully redeemed, the DRR — no longer needed for its original purpose — is transferred to General Reserve.

Illustrative journal pattern (redemption at a premium, out of profits):

1. Surplus in Statement of Profit and Loss A/c Dr. — To Debenture Redemption Reserve A/c (transfer before redemption)
2. Debentures A/c Dr. (face value) — Premium on Redemption of Debentures A/c Dr. (premium payable) — To Debentureholders A/c …