Redemption of Debentures

Q.Explain the various methods of redemption of debentures in detail. 

Answer:-

Redemption of Debentures 

Generally, companies issue redeemable debentures, the payment for which is made by the company during its lifetime. one of the following methods can be used For the redemption of debentures by the company, 

1. Redemption by Lump Sum Payment: If the company uses this method to redeem its debentures, then the entire amount payable on the debentures is paid in one go. 

2. Redemption by Annual Installments: If the company uses this method to redeem its debentures, then a lottery is used to pay the amount due on the debentures, and based on this, the debentures are paid. 

Redemption by Annual Installment can also be done in the following two ways: 

1. Redemption out of Capital 

2. Redemption out of Profit 

 3.Redemption by purchase in the open market:-the company can also redeem its debentures in the open market by purchasing them at its convenience.

If the company purchases its debentures at a price lower than their face value, it gains a capital profit, which is transferred to the capital reserve account. 

4. Redemption at the Company's Discretion: If the company uses this method to redeem its debentures, whenever the company has sufficient funds, it can redeem the debentures by giving notice to the debenture holders. 

5. Redemption by Conversion:  If the company uses this method to redeem its debentures then debenture is converted in to shares by the company.

Because When debenture holders become confident that the company's financial position is good and its future is bright, they convert their debentures into shares. 

6.Redemption by Sinking Fund 

 If the company uses this method to redeem its debentures, In that situation, a fund is established, and a specific amount is deposited into it each year. The accumulated amount in that fund is then invested in securities so that the necessary amount for redemption can be made available immediately. 

If the company issues debentures for a period exceeding 18 months, then in this situation, preparing a Debenture Redemption Fund is mandatory, whether the debentures are convertible or non-convertible. 

Note: This method of redeeming debentures is used only when the company establishes a redemption/sinking fund for the redemption of its debentures. 

The following methods can be used to transfer funds into a Sinking Fund account.

1. Cumulative Sinking Fund Method: Under this method, a fixed amount is transferred annually to a Sinking Fund account and invested in the same year. 

The calculation of the amount to be transferred to the Sinking Fund account under this method is done through a Sinking Fund table. 

2. Non-cumulative Sinking Fund Method: Under this method, an uncertain amount is transferred annually to a Sinking Fund account, and it is not necessary to invest it in the same year. 

Under this method, the interest received on investment is considered as business income and is credited to the Profit and Loss account. 

7. Insurance Policy Method:  If the company uses this method to redeem its debentures than in that condition instead of investing the Sinking Fund amount in securities An insurance policy is taken of the same amount ,for which an annual premium has to be paid to the insurance company. Upon maturity of the policy, the policy amount is received, through which the outstanding dues are paid.