The issue of debentures is a method for companies to raise long-term debt capital from the public or institutional investors by issuing acknowledgment certificates for loans. Governed by the Companies Act, 2013 and SEBI Regulations (for listed entities), it involves a trust deed with a debenture trustee to protect investor rights. Debentures carry a fixed interest rate (coupon), a redemption date, and may be secured or unsecured. The process is similar to a share issue but creates creditors, not owners. It’s a vital tool for leveraging, offering tax benefits (interest is tax-deductible) while avoiding equity dilution.
Types of Issue of Debentures:
1. Public Issue through Prospectus:
Companies raise funds from the general public by issuing a prospectus, detailing terms like interest, security, and redemption. It requires SEBI approval (for listed companies), underwriting, and involves significant cost and compliance. Used for large capital needs, it provides broad access to investors but is time-consuming.
2. Private Placement:
Debentures are offered to a select group (like QIBs, banks, HNIs) not exceeding 200 in a year (excluding certain investors). Governed by Section 42 of the Companies Act, it’s faster, cheaper, and involves less disclosure. Common for raising debt from institutional investors without public offering.
3. Rights Issue of Debentures:
Existing debenture holders or shareholders are given the right to subscribe to new debentures in proportion to their current holding. It’s a preferential offer to current stakeholders, often at favorable terms, to encourage participation and maintain their financial stake in the company.
4. Issue as Collateral Security:
A company can issue debentures as additional security for an existing loan or credit facility. These are collateral debentures, secondary to the primary loan. If the loan is repaid, these debentures become void. They are not issued for direct cash raising but to enhance creditworthiness.
5. Convertible Debenture Issue:
Issued with an option for holders to convert them into equity shares after a specified period at a predetermined ratio. This attracts investors seeking potential equity upside. It can be fully convertible (FCD) or partly convertible (PCD). Requires compliance with SEBI (ICDR) Regulations on conversion terms.
6. Redeemable Debenture Issue:
These debentures are issued with a fixed maturity date for redemption of principal. They dominate the market as the Companies Act mandates a redemption date. Terms specify redemption at par, premium, or discount. Sinking fund provisions may be created to ensure redemption funds.
7. Perpetual Debenture Issue (Rare):
Issued without a maturity date, redeemable only on winding-up or upon long notice. Under current regulations, especially for NBFCs and banks, these are treated as debt but must comply with RBI norms on loss absorption. Not common for commercial companies due to regulatory restrictions.
Process of Issuing Debentures (Public Issue)
1. Board & Shareholder Approval:
The Board of Directors proposes the issue, specifying amount, type, interest rate, and security. Shareholder approval via ordinary or special resolution (depending on the charge created) is obtained in a general meeting, as per Section 71 of the Companies Act.
2. Drafting Prospectus & Appointing Debenture Trustee:
A draft prospectus (for public issue) or private placement offer letter is prepared, disclosing all material facts. A debenture trustee (usually a bank or financial institution) is appointed to protect investors’ interests and monitor compliance with the trust deed.
3. SEBI Review & Filing (for Listed Companies):
The prospectus is filed with SEBI for observations (if listed) and with the Registrar of Companies (RoC). SEBI ensures adequate disclosure and investor protection. A credit rating from a registered agency is mandatory for public issues.
4. Opening of Subscription & Allotment:
The issue is opened for public/investor subscription. Upon receiving the minimum subscription, allotment is made. Allotment money becomes due. A debenture trust deed is executed between the company and trustee, creating a charge on assets (if secured).
5. Post-Issue Compliance & Creation of Charge:
Within 30 days of allotment, Form PAS-3 (Return of Allotment) is filed with RoC. For secured debentures, a charge must be registered with RoC via Form CHG-9 within 30 days of creation. Debenture certificates or demat credit are provided to allottees.
Accounting of Issue of Debentures
Issue of debentures means raising long term borrowed funds by a company. Debentures are shown as liabilities in the balance sheet. Accounting entries depend on the mode of issue.
1. Issue of Debentures at Par
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Bank A/c Dr | Amount received | – |
| To Debentures A/c | – | Amount |
2. Issue of Debentures at Premium
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Bank A/c Dr | Total amount | – |
| To Debentures A c | – | Face value |
| To Securities Premium A c | – | Premium |
3. Issue of Debentures at Discount
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Bank A/c Dr | Amount received | – |
| Discount on Issue of Debentures A/c Dr | Discount | – |
| To Debentures A/c | – | Face value |
4. Issue of Debentures for Consideration Other than Cash
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Asset or Vendor A c Dr | Value | – |
| To Debentures A c | – | Value |
Redemption of Debentures:
Redemption of Debentures is the process by which a company repays the principal amount to its debenture holders at maturity, as per the terms of issue, thereby extinguishing the debt liability. It is a contractual obligation governed by the Companies Act, 2013, the trust deed, and SEBI regulations for listed debentures. Redemption can occur at par, premium, or discount, and must be funded through operating profits, a sinking fund, or a fresh issue. Proper redemption is critical for maintaining corporate creditworthiness and investor trust. Failure can trigger default, damaging the company’s reputation and financial standing.
Methods of Redemption of Debentures
1. Redemption in Lump Sum at Maturity
The company pays the entire principal to all debenture holders on a single fixed maturity date. This method is straightforward but creates a significant lump-sum cash outflow, which can strain liquidity. It requires careful cash flow planning and often necessitates setting aside profits in advance. It is common for non-convertible debentures (NCDs) with a specific redemption date mentioned in the prospectus.
2. Redemption in Instalments by Annual Drawings
The company redeems debentures gradually over several years by drawing lots to select debentures for early redemption, as specified in the trust deed. Each year, a portion of the outstanding debentures is repaid, reducing the final burden. This smooths out cash outflows, aids in financial planning, and is fair to all holders as selection is random. Interest is paid only on outstanding debentures.
3. Redemption by Purchase in Open Market
The company buys back its own debentures from the open market (stock exchange) when the market price is below the redemption price. This allows redemption at a lower cost, generating a profit (capital gain) for the company. It provides flexibility but depends on market conditions and liquid trading. This method is often used to retire debt early when the company has surplus cash.
4. Redemption by Conversion
Applicable to convertible debentures, where holders exercise their option to convert the debentures into equity shares of the company at a predetermined ratio and time. Upon conversion, the debt liability is extinguished without any cash outflow, but it results in equity dilution. This method is beneficial when the company’s share price is high, making conversion attractive to investors.
5. Redemption from Capital (Fresh Issue of Shares or Debentures):
The company makes a fresh issue of shares or new debentures specifically to raise funds for redeeming the old ones. This is essentially refinancing—replacing one source of capital with another. It avoids using operational profits but may alter the capital structure and cost of capital. It requires compliance with issuance regulations.
Process of Redemption of Debentures
1. Review Terms & Ensure Compliance
The company reviews the trust deed and terms of issue to confirm the redemption date, price, and method. The Board of Directors must pass a resolution approving the redemption. For listed debentures, SEBI regulations and stock exchange intimation are mandatory. The company must ensure the redemption reserve or sinking fund (if required) is adequately funded.
2. Notify Debenture Holders & Trustee
Formal written notice is sent to all debenture holders and the debenture trustee, specifying the redemption date, amount, and procedure for surrendering debenture certificates (for physical holdings). For demat holdings, necessary instructions are given to depositories. A public notice may also be published in newspapers for widespread communication.
3. Arrange Funds & Execute Payment
The company arranges the necessary funds from the designated source: sinking fund investments, operational profits, or fresh issue proceeds. On the redemption date, the company makes the payment to holders through cheque, direct credit, or demat pay-out. For redemption at a premium, the premium amount must be provided from Securities Premium Account or profits.
4. Discharge Charge & File Returns
For secured debentures, once redeemed, the charge on assets must be satisfied and released. The company files Form CHG-4 with the Registrar of Companies (RoC) within 30 days to register the satisfaction of charge. A return of redemption should be maintained, and for listed entities, a final report is submitted to the stock exchanges. The redeemed debentures are cancelled, and the Register of Debenture Holders is updated.
Accounting of Redemption of Debentures:
Redemption of debentures means repayment of debenture amount by the company at maturity or earlier as per terms of issue. It results in discharge of liability. Accounting treatment depends on the method of redemption.
1. Debentures Due for Redemption
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Debentures A/c Dr | Face value | – |
| To Debenture Holders A/c | – | Face value |
2. Payment to Debenture Holders
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Debenture Holders A c Dr | Amount payable | – |
| To Bank A/c | – | Amount paid |
3. Redemption at Premium
If debentures are redeemed at premium
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Loss on Redemption of Debentures A/c Dr | Premium amount | – |
| To Debenture Holders A/c | – | Premium |
4. Transfer of Loss on Redemption
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| General Reserve or P and L A/c Dr | Loss amount | – |
| To Loss on Redemption of Debentures A/c | – | Loss |
