Key Points

A debenture is a written instrument acknowledging a debt issued by a company under its common seal. It represents borrowed capital and includes a contract for repayment of principal and payment of interest at a fixed rate.

A share represents ownership (owned capital) in a company, and its return is called a dividend. A debenture represents a loan (borrowed capital), and its return is called interest, which is a charge against profits.

Debentures are classified based on security (Secured/Unsecured), tenure (Redeemable/Irredeemable), convertibility (Convertible/Non-Convertible), coupon rate (Specific/Zero Coupon), and registration (Registered/Bearer).

Debentures can be issued at par (face value), at a premium (above face value), or at a discount (below face value). Premium is credited to 'Securities Premium Reserve Account', and discount is debited to 'Discount on Issue of Debentures Account'.

A company can issue debentures to a vendor for the purchase of assets or a business. If the purchase consideration is more than the net assets' value, the difference is Goodwill; if it is less, the difference is credited to Capital Reserve.

This is a secondary security given for a loan, in addition to the primary security. It can be recorded either by passing a journal entry (Debenture Suspense A/c Dr. to Debentures A/c) or simply as a note in the Balance Sheet.

When debentures are issued at a discount and are redeemable at a premium, both the discount and the premium on redemption are debited to a single account called 'Loss on Issue of Debentures Account'.

Discount or Loss on Issue of Debentures is a capital loss written off in the year of issue. It is written off first against the Securities Premium Reserve, and any remaining balance is written off against the Statement of Profit and Loss.

Interest on debentures is a charge against the profits of the company and must be paid regardless of whether the company earns a profit. The company is required to deduct Tax at Source (TDS) before paying interest to debenture holders.

Redemption means the repayment of the debenture amount to the debenture holders. The main methods are payment in lump sum, payment in instalments, purchase from the open market, and conversion into shares or new debentures.

As per the Companies Act, certain companies must create a Debenture Redemption Reserve (DRR) out of profits available for dividends. This ensures that funds are set aside for the repayment of debentures.

Companies required to create DRR must also, on or before April 30th each year, invest a sum not less than 15% of the nominal value of debentures maturing during the year ending on March 31st of the next year.

A company can buy its own debentures from the market for immediate cancellation. Any profit made on such cancellation (if purchase price is less than face value) is a capital profit and is transferred to the Capital Reserve.

Convertible debentures can be redeemed by converting them into new shares or new debentures at a pre-determined rate. This can happen at par, premium, or discount as per the terms of issue.