Redeeming debentures: lump sum and instalments

Debentures can be redeemed in four ways: in a lump sum on the due date; in instalments (chosen by draw of lots); by buying them in the open market; or by converting them into shares.

The law asks the company to protect the lenders in two ways:

• Debenture Redemption Reserve (DRR): 'other unlisted' companies set aside 10% of the outstanding debentures out of profits: Surplus Dr. To DRR. Listed companies, banks, NBFCs and housing finance companies are exempt.
• Debenture Redemption Investment (DRI): every company must invest at least 15% of the debentures maturing in the year, by April 30 of that year: DRI Dr. To Bank. It is realised (cashed in) at the time of redemption.

The redemption entries:

• Debentures Dr. (and Premium on Redemption Dr.) To Debentureholders;
• Debentureholders Dr. To Bank.

After all the debentures are redeemed, the DRR is no longer needed: DRR Dr. To General Reserve. In instalments, the DRI is carried forward and topped up or partly realised each year.

Example: debentures of 6,00,000 are due next year. DRI = 15% × 6,00,000 = 90,000: DRI Dr. To Bank 90,000.