Redemption of Debentures: Conversion into Shares or New Debentures
What is Redemption of Debentures?
Repayment of debentures to the debenture holders or discharge of the liability on account of debentures is known as the redemption of debentures. They are normally redeemed at the expiry of the period for which they were originally issued. The company may also redeem the debentures before the expiry of the fixed period either by instalments or by purchasing them in the open market if authorised by its articles of Association and the terms of issue.
Redemption of Debentures by Conversion into Shares or New Debentures:
Companies usually redeem their debentures in cash; however, sometimes they give an option to debenture holders that their debentures will be converted into shares or redeemed. These types of debentures are known as Convertible Debentures.
Merits of Conversion:
1. In the initial stage, the debenture holders of a company are treated as secured creditors and are paid interest at a fixed rate, whether or not the company earns profits during the year.
2. On conversion of debentures, the debenture holders become shareholders, and get dividends on shares, and exercise their right to vote in the company’s general meeting.
3. The converted shareholders also get benefits when there is an appreciation in the value of their shares. Besides in future, these shareholders also might get the right shares and bonus shares as well.
Rules of Conversion:
- According to the Companies Act, the non-convertible part of a debenture cannot be redeemed by the method of conversion.
- As per SEBI guidelines, the conditions of the creation of DRR (Debenture Redemption Reserve) do not apply to the conversion method.
- The debenture holders have the option to convert their debentures in the case when the conversion is to be made at or after 18 months but before 36 months of allotment.
Accounting Treatment for Conversion:
Debentures are generally redeemable at par or premium. The accounting treatment for the same is as follows:
1. For Amount due to debenture holders:
i) Debentures redeemable at Par:
ii) Debentures redeemable at Premium:
2. For discharging payment by issuing Share/Debentures:
i) New Share/Debenture issued at Par:
ii) New Shares/Debentures issued at Premium:
ii) New Shares/Debentures issued at Discount:
Pass necessary Journal Entries in the books of Astha Ltd. in the following cases for redemption of 1000 12% debentures of ₹50 each issued at par:
i) Debentures redeemed at par by converting into 10% Preference Shares of ₹100 each.
ii) Debentures redeemed at a premium of 12% by conversion into equity shares issued at par.
iii) Debentures redeemed at a premium of 14% by conversion into equity shares issued at a discount of 5% @ ₹100 each.
Working Note 1:
= 500 Shares @ ₹100 each
Working Note 2:
=600 Equity Shares @ ₹100 each
Pawan Ltd. issued ₹10,00,000 8% debentures on 1sr April 2017 at a premium of 5%. On 31st March 2022out of these ₹1,00,000 8% debentures were redeemable by converting them into equity shares of ₹100 each issued at par, and ₹2,50,000 8% debentures were converted into 10 % Preference Shares of ₹100 each issued at a premium of 25%. Pass necessary Journal Entries in the books of Pawan Ltd. for the redemption of debentures.
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