Generally, a company redeem its debentures by purchasing in the open market when the interest rate of debentures is higher than the market interest rate. Under this method, debentureholders are given the right to exercise the option to convert their debentures into shares or new class of debentures.
When can debentures be redeemed?
Debentures can be redeemed either at par or at a premium. The terms and conditions of redemption are usually given in the prospectus inviting applications for the issue of debentures.
What are the source of redemption of debentures?
Profit on redemption of debentures is a capital profit. It is used to write-off discount on issue of debentures/shares, otherwise it will be transferred to capital reserve. Debentures may be redeemed out of capital or out of profits.
When debentures are redeemed which account is debited?
When all the debentures are redeemed, the Debenture Redemption Reserve Account is closed by transferring to General Reserve Account. The following journal entries will be passed: Illustration 1: A Limited Company has a balance of Rs 1, 00,000 at the credit of Profit and Loss Account.
Why debentures should be redeemed?
A debenture redemption reserve (DRR) is a requirement imposed on Indian corporations that issue debentures. A DRR requires the corporation to create a debenture redemption service to protect investors from the possibility of a company defaulting.
What is difference between share and debenture?
Share is the capital of the company, but Debenture is the debt of the company. The shares represent ownership of the shareholders in the company. On the other hand, debentures represent indebtedness of the company. The income earned on shares is the dividend, but the income earned on debentures is interest.
Is debenture a debt?
A debenture is a type of debt instrument that is not backed by any collateral and usually has a term greater than 10 years. … Both corporations and governments frequently issue debentures to raise capital or funds. Some debentures can convert to equity shares while others cannot.
Can debentures be redeemed before maturity?
This one-time method is considered to be among the simplest redeeming options. As per this method, debenture holders receive the promised sum on the prefixed date. … The issuing company may decide to pay off the debenture amount before its maturity.
What is not a type of debentures?
6. Non-redeemable Debentures: Non-redeemable Debentures cannot be redeemed in a Company’s lifetime. Non-redeemable Debentures are only paid back on company’s liquidation.
What are the characteristics of debentures?
- Written promise.
- Company Seal.
- Borrowed Funds.
- Maturity Period.
- Claim in Income.
- Priority Claim on Assets.
- No Controlling Power.
- Fixed Rate of Interest.
How many types of debentures are there?
Two types of debentures are issued by the companies: Convertible Debentures and Non-Convertible Debentures.
CONTINUE READING BELOW
Why debentures are not redeemed at discount?
No, debentures issued at premium or par cannot be redeemed at discount because redemption of debentures at discount implies that the debentureholders are getting lesser than what they have earlier invested at the time of issue.
What is the maximum limit of debentures which a company can redeem out of capital?
05% per year of the face value of the debentures, subject to the maximum of 0.25% or Rs 25 lakh, whichever is lower.