Accountancy · Ch 6 — Issue and Redemption of Debentures
From the view Point of Registration
From the view Point of Registration
Concept First
The textbook distinguishes debentures based on how ownership is recorded and transferred. This classification is crucial because it determines the legal process for selling the debenture and who the company pays interest to. The two categories are Registered Debentures and Bearer Debentures.
(a) Registered Debentures
A registered debenture is one where the company maintains a formal record of the holder. The company keeps a Register of Debentureholders that contains the name, address, and number of debentures held by each person.
Key features:
- The company knows exactly who the debentureholder is at all times.
- Transfer of ownership is not automatic. To sell a registered debenture, the holder must execute a regular transfer deed — a legal document that formally transfers ownership from the seller to the buyer.
- The company updates its register only after receiving and approving this transfer deed.
Accounting implication: The company pays interest directly to the person whose name appears in the register on the record date. The journal entry for interest payment is the same as for any debenture (Debit: Debenture Interest A/c, Credit: Bank A/c), but the payee is specifically identified.
(b) Bearer Debentures
A bearer debenture is the opposite — the company does not keep any record of who holds these debentures. The debenture certificate itself is a negotiable instrument.
Key features:
- Ownership is transferred simply by delivery of the physical certificate. No transfer deed is needed. Whoever holds the certificate is the owner.
- The company does not maintain a register of holders for bearer debentures.
- Interest is paid to the person who presents the interest coupon attached to the debenture. Each bearer debenture has a set of coupons (one for each interest payment date). The holder clips the relevant coupon and presents it to the company (or its bank) to receive the interest payment.
Accounting implication: The company cannot identify the payee in advance. Interest is paid to the bearer of the coupon. The journal entry remains the same (Debit: Debenture Interest A/c, Credit: Bank A/c), but the payment is made against the coupon, not against a name in a register.
Summary of Differences
| Feature | Registered Debentures | Bearer Debentures |
|---|---|---|
| Record keeping | Company maintains a register of holders | No record kept by the company |
| Transfer method | Requires a regular transfer deed | Transferable by mere delivery |
| Interest payment | Paid to the person named in the register | Paid to the person who presents the interest coupon |
| Ownership evidence | Entry in the company's register | Physical possession of the certificate |
Bearer debentures are more liquid (easier to transfer) but less secure for the holder — if the certificate is lost or stolen, the holder loses ownership. Registered debentures are safer but involve paperwork for transfer.