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Redemption of Debentures

In: Business and Management

Submitted By jasvishwesh
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Redemption of Debentures: A company may issue redeemable as well as irredeemable debentures. But debentures issued by companies are usually redeemable debentures. There are two important ways of redeeming the debentures according to the term of the issue.

Redemption of Debentures on a Fixed Date: In this method, payment to debenture holder is made at the expiry of the stated period. A "Sinking Fund" is created by debiting the "Profit & Loss Appropriation Account". The amount so credited in the sinking fund account is invested in the gilt edged securities. These securities are sold at the date of redemption of debentures. The sinking fund or debenture fund account is then transferred to the General Reserve. Some companies take up sinking fund insurance policy to redeem the debentures.

Redemption of Debentures on annual installments: In this method, payment is made year after year, after a certain portion of the total debentures by drawings. As such the revenue account is debited with the annual drawings and the Redemption Fund Account are credited.

Sinking Fund: It is a kind of reserve by which a provision is made to reduce a liability, e.g. redemption of debentures or repayment of aloan. A sinking fund is a form of specific reserve set aside for the redemption of a long term debt. The main purpose of creating a sinking fund is to have a certain sum of money accumulated for a future date by setting aside a certain sum of money every year. It is a kind of specific reserve.

Whatever the object or the method of creating such a reserve may be, every year certain sum of money is invested in such a way that withcompound interests, the exact amount to wipe off the liability or replace the wasting asset or to meet the loss will be available. The amount to be invested every year can be known from the compound interest annuity tables.

Alternatively an endowment policy may be taken out which matures on the date when the amount required will be paid by the insurance company. The advantage of this method is that a definite amount will be available, while in the case of investment of fund in securities, the exact amount may not be available on account of fall in the value of securities. After the liability is redeemed the sinking fund is no longer required as it is the undistributed profit it may be distributed to the shareholders or may be transferred to the General Reserve Account.

Debenture Redemption Reserve: The newly introduced Section 117C in the Companies Act, 1956 by Companies (Amendment) Act, 2000 has made a bold step in protecting the interests of debenture holders by making it mandatory for the company to create security and debenture redemption reserve. Accordingly, it shall now be mandatory for the companies to create a debenture redemption reserve for the redemption of debentures. The company shall have to credit adequate amount from out of its profits every year till such debentures are redeemed.

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