issue of debentures

DEBENTURESIn corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money.A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure.

DEBENTURES VS SHARESCHARACTERISTICS DEBENTURES SHARES

Capital/Loan Part of loan of the co. Part of capital of the co.

Presentation On Liabilities side under Secured Loan.

On Liabilities side under Share Capital.

Creditor/Owner Holders are the creditors. Holders are the owners.

Participation in Management

Debentureholders do not participate in the management of the company because they do not have any threat to the existing control of the company.

Shareholders participate in the management of the company and control the total affairs of the company

Voting Right Do not have voting right. Have voting right.

Interest/Dividend Interest is paid at pre-determined fixed rate whether there is any profit or not

Dividend on equity shares is paid at variable rate affected by the profits of the company.


Expense/Appropriation Debenture Interest is charges against the profit and deductible as expense to determine taxable profit of the company.

Dividend is appropriation of the profit and not deductible to determine taxable profit of the company.

Repayment At maturity holders get back their money as per the terms & conditions of redemption.

Equity shareholders can not get back their money before the liquidation of the company.

Convertibility Can be converted into shares or other debentures as per terms of issue.

Can not be converted into debentures.

Forfeiture Can not be forfeited for non-payment of call(s) money.

Can t be forfeited for non-payment of allotment and/or call(s) money.


Priority For Payment At the time of liquidation debentureholders are paid- off before the shareholders.

Shareholders are paid at last after paying debentureholders, creditors etc.

Surplus At Liquidation Surplus is not paid to debentureholders.

After paid all the liabilities if there is any surplus, is paid to shareholders.

CLASSIFICATION OF DEBEBTURES

From security point of viewOn the basis of redemptionOn the basis of NegotiabilityOn the basis of convertibilityOn the basis of priorityFrom coupon or interest rate point of view

TYPES OF DEBEBTURES From security point of view

Secured or Mortgage debentures Unsecured debentures

On the basis of redemption Redeemable debentures Non-redeemable debentures

On the basis of Negotiability Registered debentures Bearer debentures

On the basis of convertibility Convertible debentures Non-convertible debentures

On the basis of priority First debentures Second debentures

From coupon or interest rate point of view Coupon rate point Zero coupon Rate

TYPES OF DEBEBTURES

From security point of view Secured or Mortgage debentures

secured by a charge on the assets of the company.debenture holders have the right to recover their principal

amount with the unpaid amount of interest on such debentures out of the assets mortgaged by the company.

Unsecured debenturessuch debentures do not carry any security with regard to the

principal amount or unpaid interest.

TYPES OF DEBEBTURESOn the basis of redemption

Redeemable debentures debentures are issued for a fixed period. principal amount of such debentures is paid off to the debenture

holders on the expiry of such period. such debentures can be redeemed by annual drawings or by

purchasing from the open market. Non-redeemable debentures debentures which are not redeemed in the life time of the company. such debentures are paid back only when the company goes into

liquidation.

TYPES OF DEBEBTURES

On the basis of Negotiability Registered debentures

debentures that are registered with the company. amount of such debentures is payable only to those

debenture holders whose name appears in the register of the company.

Bearer debentures debentures which are not recorded in a register of the

company. such debentures are transferrable merely by delivery. holder of these debentures is entitled to get the interest.

TYPES OF DEBEBTURES

On the basis of convertibility Convertible debentures

debentures that can be converted into shares of the company on the expiry of pre-decided period.

the term and conditions of conversion are generally announced at the time of issue of debentures.

Non-convertible debenturesdebentures that can not be converted into shares of the

company.

TYPES OF DEBEBTURES

On the basis of priority First debentures

debentures are redeemed before other debentures. Second debentures

debentures are redeemed after the redemption of first debentures.

TYPES OF DEBEBTURES

From coupon rate or interest rate point of view Coupon rate point

Usually debentures are issued with a coupon rate, that is annual interest rate on the face value of debentures.

This rate may be fixed or floating with the market interest rate.

Zero coupon rateSuch debentures does not carry coupon rate or specified

interest rate with itself.These debentures are issued with substantial discount to

compensate the investor for interest.

DEBENTURES AS COLLATERAL SECURITY Collateral security

security given in addition to the principal security. It is a subsidiary or secondary security.

Issue of Debentures as Collateral security Whenever a company takes loan from bank or any financial institution

it may issue its debentures as collateral security. such debentures are issued completely on temporary basis and the

bankers refund the debentures whenever the loan is repaid. When company pays the loan amount this right does not arise and

debentures will be returned back to the company. However if the loan is not repaid and the principal security is

exhausted then the banker will have a right over such debentures and such issue becomes permanent.

No interest is paid on the debentures issued as collateral security because company pays interest on loan.

ACCOUNING TREATMENT OF DEBENTURES AS COLLATERAL SECURITY

Alternative-1 No journal entry to be made in the books of accounts of the company:Entry is passed only for taking a loan.

Bank A/C Dr. To Bank Loan A/C

A note of this fact is given on the liability side of the balance sheet under the heading Secured Loans and Advances.


Balance Sheet ...... Co. Ltd.

Capital & liabilities Amount (Rs.)

Assets Amount(Rs.)

Current AssetsBank 50,00,000

Secured Loan & AdvancesBank Loan(Secured by the issue of ....debentures of Rs .... Eachissued as collateral security

50,00,000


Alternative-2 Journal entry to be made in the books of accounts of the company: A journal entry is made on the issue of debentures as a collateral

security with the entry for taking a loan. Debentures suspense A/c is debited because no cash is received for

such issue.

Bank A/C Dr. (With Loan Amount)To Bank Loan A/CDebentures Suspense A/C Dr. (With Collateral Security)To Debentures A/C(.....Debentures of Rs .... each issued as collateralsecurity to .....)


Balance Sheet ...... Co. Ltd.

Capital & liabilities Amount (Rs.)

Assets Amount(Rs.)

Debentures (.... Debenturesof Rs .... per debentureissued as collateral security

30,00,000 Current Assets Bank 50,00,000

Secured Loan & AdvancesBank Loan(Secured by the issue of ....debentures of Rs .... Eachissued as collateral security

50,00,000Miscellaneous ExpenditureDebentures Suspense A/C(Debentures issued as collateral security for loan as per contra)

30,00,000

INTEREST ON DEBENTURES A coupon rate is carry with debentures such as 9%

Debentures or 12% Debentures. It is the rate of interest per annum. Interest is always paid on the face value of debentures. Companies generally pay interest on its debentures after

every six months. The TDS will be deducted on the interest as prescribed

rate on the behalf of debenture holders. (ITA 1961) This deducted TDS will be deposited into Govt. treasury. At the end of the accounting year interest is transferred to

Profit & Loss Account.

ACCOUNTING TREATMENT OF INTEREST ON DEBENTURES

For making Interest DueInterest on Debentures A/C Dr. To Debentureholders A/C

For making Payment of Interest and Deduction of (TDS)Debentureholders A/C Dr. To Bank /C To TDS Payable A/C

For making Payment TDSTDS Payable A/C Dr. To Bank A/C

For Transferring Interest to P&L A/CProfit & Loss A/C Dr. To Interest on Debentures A/C

issue of debentures

Economy & Finance