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ACCOUNTANCY Issue of Debentures

Issue of Debentures
Introduction to Debentures
Meaning and Characteristics of Debentures:


Meaning of Debentures as per Section 2(30) of the Companies Act, 2013: Debenture includes
debenture stock, bonds and any other instrument of the company evidencing a debt, whether
constituting a charge on the assets of the company or not
...

Debentures:
 It is a document known as Debenture Certificate
...

 It is an agreement between the company and its debenture holders for repayment of
the principal amount on a specified date along with interest at a pre-determined rate
charged on the principal amount until the principal is repaid
...

ii
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 These persons are lenders to the company as they provide funds in exchange of
debentures issued to them
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A document known as Debenture Certificate
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An acknowledgement of debt by the company
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Involves an agreement between the company and its debenture holders to fix the mode and
period of repayment of principal and interest
...

It is a common practice to prefix ‘Debentures’ with the rate of interest like if the rate of
interest is 10%, the title of the debentures will be ‘10% Debentures’
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It is treated as an external equity or long term borrowings by the company
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It is usually secured by way of charge on the assets of the company
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The interest charged on debentures is a charge against profit
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It is an
acknowledgment of debt issued by the company and signed by an authorized signatory
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But these days, bonds are also being issued
by semi-government and non-government organisations as an acknowledgement of debt
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no
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Ownership

It is a debt taken by the company It is the capital of a company and
and therefore, holder of such a therefore, holder of such share is the

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Share

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ACCOUNTANCY Issue of Debentures



document is a lender
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In form of dividend which is paid by
the company as an appropriation out
of profits
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2
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3
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except for preference share which is
redeemed on the due date
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Convertibility

It can be converted into shares
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Issue
Discount

6
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company
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Risk

It is relatively safe as most secured Relatively riskier, as shareholder can
debentures are risk free
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8
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attend and vote in general meetings
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Priority as to In the event of winding-up, In the event of winding-up, payment
repayment of debentures are paid before the to shareholders is made after
Principal
payment of share capital
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during
winding-up

at It can be issued at discount
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It is not issued at discount except
Sweat Equity Shares
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Basis

Shareholders

1
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the company
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Return

Shareholders get dividend on Debentureholders get interest at the
their investment
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company suffers losses
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Control

Shareholders have the right to Debentureholders do not have such
attend and vote in the General right
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they are at a greater risk
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Security point of view:
a
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Such charge is to be registered with the Registrar of the
Companies
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Unsecured: Such debentures are not secured by any charge on assets of the
company
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Redemption/Permanence point of view:
a
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b
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iii
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Registered: Such debentures are registered in the company’s records in the holder’s
name
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Any transfer of such debentures requires execution of transfer
deed
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Bearer: Such debentures are not registered in the records of the company in the
name of the holder
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Interest is paid to
the person who produces coupons attached to the debenture
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Priority point of view:
a
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b
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v
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Specific Coupon Rate: Such debentures are issued with a specified rate of interest,
called the coupon rate
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If it’s a floating rate, it
is usually linked with the bank rate
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Zero Coupon Rate (Bonds): Such debentures do not carry a specific rate of interest
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Such difference between the face value and
issue price is the total amount of interest related to the duration of debentures
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Convertibility point of view:
a
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Where only a part of the
debentures amount is convertible into Equity Shares, they are known as Partly
Convertible Debentures
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b
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ACCOUNTANCY Issue of Debentures


Disclosure of Debentures in the Balance Sheet: Since these are the borrowings of a company,
they are considered as liability and therefore, shown in the Equity and Liabilities part of the
Balance Sheet
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An important point to remember is that unless the question requires
otherwise, debentures are shown as Long-term Borrowings under Non-current Liabilities
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e
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The date of issue of debentures determines whether these debentures are Long-term
borrowings or Short-term Borrowings
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Short-term Borrowings: This is done when Debentures are due for redemption within
12 months from the reporting date i
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, the date of Balance Sheet or within the period of
Operating Cycle
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Current Maturities of Long term debt: This is a part of Debentures shown as Longterm borrowings that become due for redemption within 12 months of the Balance Sheet
or within the period of Operating Cycle
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Such minimum
subscription is therefore, to be decided by the company
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

Issue of Debentures: As per the Companies Act, 2013, a company may issue debentures:
i
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When debentures are issued at cash, they may be issued at par,
premium or at discount
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for Consideration other than Cash: It means that the company has not received amount (in
cash or cheque) against the debentures issued
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iii
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Debentures may be issued as collateral security when the
borrower is not in a position to give any other asset as a collateral security
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 At premium: Debentures are issued at a price that is higher than its nominal (face) value
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Utilisation of balance in such Securities Premium Account is governed by Section
52(2) of the Companies Act, 2013
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Such amount of discount is debited to an account titled Discount on Issue of Debentures
Account
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Since, it is a capital loss it is written off from Capital Reserve, if it has a balance
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

Disclosure of Unamortised Discount (loss) on issue of Debentures: Since, the balance in
such account is written off over the life of debentures but within the tenure of debentures, it will
have a debit balance
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Under Current Assets: That part of unamortised discount or loss on issue of debentures
which is to be written off within a period of 12months from the date of Balance Sheet or
within the period of Operating Cycle is shown in the Balance Sheet under the head ‘Current
Assets’ and sub-head ‘Other Current Assets’
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Under Non-Current Assets: That part of unamortised discount or loss on issue of
debentures which is to be written off after a period of 12months from the date of Balance
Sheet or after the period of Operating Cycle is shown in the Balance Sheet under the head
‘Non-Current Assets’ and sub-head ‘Other Non-Current Assets’
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For receipt of Application Money:
Bank A/c
…Dr
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For allotment of Debentures:
Debentures Application and Allotment A/c
…Dr
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For Refund of Excess Application Money:
Debentures Application and Allotment A/c
…Dr
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For receipt of Application Money:
Bank A/c
…Dr
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For allotment of Debentures:
Debentures Application A/c
…Dr
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For adjustment of Excess Debentures Application Money:
Debentures Application A/c …Dr
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For Refund of Excess Debentures Application Money:
Debentures Application A/c …Dr
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For Allotment Money Being Called:
Debentures Allotment A/c
…Dr
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

To % Debentures A/c
For receipt of Allotment Money:
Bank A/c
…Dr
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(With the money due on call)
To % Debentures A/c
For receipt of call money:
Bank A/c
…Dr
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issuing fully paid bonus shares to the members;
ii
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writing off the expenses of, or the commission paid or discount allowed on any issue of
securities or debentures of the company;

iv
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in purchasing its own shares i
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, in case of buy back of shares
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

Collateral Security: Loans taken are secured by mortgage of the assets which are known as
prime or principal security
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Such security is realised by the lender only if the due amount cannot be
recovered by realising the principal security
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

Accounting of Debentures issued as collateral security: When the debentures are issued as
collateral security, they can be dealt in following 2 ways:
i
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It is disclosed under the head
Secured Loans in the Equity and Liabilities part of the Balance Sheet
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Second Method: As per this method, entry for issue of such debentures is passed in the
books of account as follows:
Debentures Suspense A/c …Dr
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In balance sheet, such debentures are disclosed
separately from the other debentures
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Accounting treatment for the same is as follows:
i
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ii
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Following

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