Topic - 1 | Meaning, Features, Type and Issue of Debentures:
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COMPANY – ISSUE OF DEBENTURES
I. MEANING, FEATURES, TYPES AND ISSUE OF DEBENTURES
A. Definition
According to Section 2(20) of the Companies Act, 2013, “Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not”
a) Meaning
Debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates.
b) Bond
Bond is also an instrument of acknowledgement of debt. In the Bond instead of rate of interest amount payable on maturity is mentioned.
c) Any other Instrument evidencing a debt
It means any instrument other than debenture or bond issued by the Company substantiating borrowing. For example Company invites money from Pubic in the form of Pubic deposits
d) Charge
According to Section 2(16) of the Companies Act, 2013, Charge is an interest or lien created on the assets or property of a Company or any of its undertaking as security and includes a mortgage
Charge on assets means the right of the lender to be paid from a borrower’s asset if the debt is not paid on time.
e) Debenture holders
The persons to whom the debentures are issued, are called debenture holders. The debenture holders are not the owners of the company. They are the lenders of the company.
f) Trust Deed
The Company issuing debentures to public is required to appoint trustees and execute a trust deed.
The Trustees protect the interest of the debenture holders through the powers granted by the trust deed.
B. Characteristics/Features of Debentures
A debenture is a written document or certificate which acknowledges the debt by the company.
The debenture certificate is issued under the common seal of the company.
Mode and period of payment of principal and interest is fixed and is stated in the debenture.
Rate of interest is fixed and is stated in the debenture.
The debt taken by issue of debentures is usually secured by a charge on the assets of the company.
It is considered as an external equity or Long-term Borrowings of the company.
C. Distinction between Share and Debenture
D. Type of Debentures
a) On the basis of Security
b) On the basis of Redemption
c) On the basis of Registration
d) On the basis of Convertibility
E. Disclosure in the Balance Sheet
Case-A Debentures are due for redemption after 12 months/operating cycle from the Balance Sheet date
Case-B Debentures are due for redemption within 12 months/operating cycle from the Balance Sheet date
F. Issue of Shares at Par, Premium or Discount
a) Par value
Par value means the nominal amount or face value of debenture
When issue price of the debenture is exactly equal to their nominal value or face value, Debentures are said to be issued at par
For example, debenture of face value of Rs. 100/- issued at Rs. 100/-
b) Premium
When the debentures of a company are issued at more than its nominal value (face value), the excess amount is called premium
The premium amount is credited to a separate account called ‘Securities Premium Account’ and is shown under the title ‘Equity and Liabilities’ of the company’s Balance Sheet under the head ‘Reserves and Surpluses’
For example, debenture of face value of Rs. 100/- issued at Rs. 120/- then it is said to be issued at premium of Rs. 20/-
c) Discount
When debentures are issued at less than their nominal value they are said to be issued at discount
For example, debenture of Rs. 100 each is issued at Rs. 90 per debenture
The discount is debited to a separate account called Discount on Issue of Debentures Account.
Discount on Issue of Debentures is written off in the same year in which debentures were allotted.
The write off is done from Capital Reserve, Securities Premium Reserve, General Reserve or from the Statement of Profit & Loss in that sequence.
The discount on issue of debentures is allowed on allotment.
Topic - 2 | Issue of Debentures for Consideration other than Cash:
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COMPANY – ISSUE OF DEBENTURES
II. ISSUE OF DEBENTURES FOR CONSIDERATION OTHER THAN CASH
A. On Purchase of Assets
Where a company has purchased assets from a vendor and enters into an arrangement with the said vendor that instead of settlement of his dues in cash, the vendor agrees to accept fully paid debentures of the company issued to them.
These debentures can be issued at par, at premium or discount and the number of debentures to be issued will depend upon the price at which the debentures are issued and the amount payable to the vendor
The number of debentures issued to the vendor will be calculated as = Amount Payable/Issue Price
B. On Purchase of Business
Where a company purchases business of another entity and enters into an arrangement with the said entity that instead of settlement of their dues in cash, the owners of the entity agrees to accept fully paid debentures of the company issued to them.
These debentures can be issued at par, at premium or at discount and the number of debentures to be issued will be calculated as Purchase Consideration Amount/Issue price
C. Issue of Debentures to Promoters
Sometimes debentures are issued to the promotors of the company in lieu of the services provided by them during the incorporation of the company.
D. Issue of Shares to Underwriters
Underwriters undertake to subscribe the securities that remain unsubscribed by public. The Underwriter charges a commission for his servicers.
Topic - 3 | Issue of Debentures as Collateral Security:
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COMPANY – ISSUE OF DEBENTURES
III. ISSUE OF DEBENTURES AS COLLETERAL SECURITY
A collateral security may be defined as a subsidiary or secondary or additional security besides the primary security
Whenever a company takes loan from bank or any financial institution it may issue its debentures as secondary security
Such an issue of debentures is known as ‘Issue of Debentures as Collateral Security’
No interest is paid on the debentures issued as collateral security because company pays interest on loan
The liability of the Company is towards the loan availed and not for the face value of debentures issued
If the company fails to repay the loan along with interest, the lender is free to receive his money from the sale of primary security and if the realisable value of the primary security falls short to cover the entire amount, the lender has the right to invoke the benefit of collateral security whereby debentures may either be presented for redemption or sold in the open market.
In case the need to exercise this right does not arise, debentures will be returned back to the company.
Accounting Treatment
Method-1 No Journal Entry is passed
No entry is made in the books of accounts since no liability is created by such issue.
However, on the liability side of the balance sheet, below the item of loan, a note to the effect that it has been secured by issue of debentures as a collateral security is appended.
Disclosure in the Balance Sheet
Method-2 Journal Entry is passed
Disclosure in the Balance Sheet
Topic - 4 | Issue of Debentures from Redemption point of view:
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Study Material & Notes for the Chapter 9
COMPANY – ISSUE OF DEBENTURES
IV. ISSUE OF DEBENTURES FROM REDEMPTION POINT OF VIEW
Redemption of debentures means repayment of the amount of debentures by company
Debentures can be issued at Par, Premium or Discount
Debentures can be redeemed at Par or Premium
Hence there are six combination possible as depicted in the figure below
2. Debentures issued at Premium and Redeemable at Par
(Issued at Rs. 125/- and Redeemed at Rs. 100/-)
3. Debentures issued at Discount and Redeemable at Par
(Issued at Rs. 95/- and Redeemed at Rs. 100/-)
Discount on issue of debentures is netted off from Securities Premium Reserve (if it exists) or from the Statement of Profit & Loss Account in the year debentures are allotted
4. Debentures issued at Par and Redeemable at Premium
(Issued at Rs. 100/- and Redeemed at Rs. 110/-)
The liability of Premium on redemption arises the time of redemption of debentures. Being a known lability, following the prudence concept it is recorded on allotment of debentures itself
5. Debentures issued at Premium and Redeemable at Premium
(Issued at Rs. 125/- and Redeemed at Rs. 110/-)
6. Debentures issued at Discount and Redeemable at Premium
(Issued at Rs. 95/- and Redeemed at Rs. 110/-)
Disclosure in the Balance Sheet
Case-A Debentures are due for redemption after 12 months/operating cycle from the Balance Sheet date
Balance Sheet
Debentures will be shown under the heading ‘Long-term Borrowing’
Premium on Redemption of Debentures will be shown under the heading ‘Other Long-term Liabilities’
Case-B Debentures are due for redemption within 12 months/operating cycle from the Balance Sheet date
Debentures will be shown under the heading ‘Short-term Borrowing’
Premium on Redemption of Debentures will be shown under the heading ‘Other Current Liabilities’
Topic - 5 | Interest on Debentures:
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Study Material & Notes for the Chapter 9
COMPANY – ISSUE OF DEBENTURES
V. INTEREST ON DEBENTURES
When a company issues debentures, it has to pay interest thereon at fixed percentage periodically (quarterly/half yearly/yearly) until debentures are repaid
Interest is computed at the nominal value of debentures.
This percentage is usually as part of the name of debentures like 8% debentures, 10% debentures, etc.
Interest on debenture is a charge against the profit of the company and must be paid regularly even when Company suffers a loss or does not earn profits.
According to Income Tax Act, 1961, a company paying interest on debentures is required to deduct income tax at the prescribed rate from the gross amount of debenture interest (if it exceeds the prescribed limit) before any payment is made to the debenture holders (Tax Deducted at Source).
Illustration
Debenture Face Value
Rs. 100
Number of Debentures
10,000
Period
6 months
Interest rate
9% per annum
Profit & Loss A/c
Loss Rs. 75,00,000
Interest Amount
(10,000×100)x9%x6/12 = Rs. 45,000
Income Tax (TDS) @ 10%
45,000×10% = Rs. 4,500/-
Interest Net of TDS
45,000-4,500=Rs. 40,500
Interest on Debentures – Accrual
Interest may be paid periodically and the period may be quarterly, half-yearly or yearly
The date of payment of interest may be coincide with the end of the accounting period
For example interest is payable half yearly on 30th Jun and 31st December
In this case, at the end of the accounting year on 31st March, interest for the period 1st Jan to 31st Mar needs to be accrued in the books of accounts
Topic - 6 | Writing Off Discount/Loss on Issue of Debentures:
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Study Material & Notes for the Chapter 9
COMPANY – ISSUE OF DEBENTURES
VI. WRITING OFF DISCOUNT/LOSS ON ISSUE OF DEBENTURES
Discount or Loss on issue of debentures is a capital loss and is written-off in the year it is incurred i.e. in the year debentures are allotted.
Discount or loss is written-off from the following:
