Debentures are debt instruments. Therefore, the debenture holder will receive the principal payment at the end of the term. This process of repaying company debts is called debenture settlement.
Let us learn more about the different ways to repay debentures and how to account for them.
What is Redemption of Debentures?
Generally speaking, this can be said to be the process of repayment of debentures issued by the company to debenture holders. In other words, this is the process of returning the principal to the bondholders.
This transaction is noteworthy for most merchants because the refund amount is quite high. After the debenture exchange, the issuing company redeemed its liabilities and removed them from the balance sheet. As a result, the company has established a solid income reserve and accumulated capital to repay debt.
Repayment conditions are usually listed in the commitment table. It is worth noting that the bond repayment method can be understood as the following indicators:
- Debentures can be repaid at a premium or face value.
- Repayment method: Return the debenture quantity to the debenture holder.
- All conditions attached to the exchange are mentioned in the prospectus of the company that initiated the bond issuance.
What is Debenture Redemption Reserve?
The debenture redemption reserve (DRR) is a clause that requires any company issuing bonds to set up a bond repurchase service to protect investors from the company’s possible default.
A debenture is a debt security that enables investors to borrow funds at a fixed interest rate. The tool is considered unsecured because it is not secured by any assets, collateral or any other form of collateral. In order to protect debenture holders from the risk of default by the issuing company, a redemption authorization was introduced in Section 117C of the Indian Companies Act of 1956. The issuer’s annual profit before the debenture exchange must be at least 25% of the face value of the bond.
Advantages of Debenture Redemption
- If the market price of your own debt is lower than the recoverable amount, it is lower than the amount due.
- Decrease in interest payable to third parties.
- If the debenture is exchanged at a premium on the date of issuance, the premium can be reduced.
A company can sometimes purchase debentures that exceed the recoverable amount for the following reasons:
- Maintain solvency ratio.
- Use excess cash or funds that are idle in the company.
- When the interest rate of the debentures is higher than the current market interest rate of the industry liability.
Sources of Redemption of Debentures
- Newly issued equity or products of debt holders.
- Cumulative profit.
- Proceeds from the sale of real property, plant and equipment.
- The company can purchase its own debentures at the cost of available funds.
Debenture Redemption Methods
There are many ways to repay debts. Each method follows a unique billing method. These methods can be divided into the following categories:
- One-time payment due- Lump-Sum
- Installment payments after the due date
- Amortization through the purchase of debt securities on the market.
- Depreciation by converting borrowed capital into newly borrowed capital or equity shares.
Lump-Sum Payment on Debenture’s Maturity
In this case, the company will pay the debt in a one-time payment after the expiration of the validity period. In exchange for a one-time payment, the amount and maturity date will be in accordance with the conditions discussed with the issuance obligations.
Because the company knows the due date, it can make financial preparations in advance. The flat rate that specifies the flat rate also includes the funds reserved for the settlement of debentures in the reserve account.
Installment Payment after the Maturity Date
Using this method of debt repayment, the borrowed funds are repaid in regular or irregular installments according to the terms of the debt with specified obligations.
Redemption by Buying Debentures in the Market.
In this case, the company and the firms are ready to buy their debentures in the market. You can also cancel immediately as this allows the company to extend the maturity date of the debt until the payment meets its financial capabilities.
In addition, if bonds are purchased at a discount on the open market, the company may seize the opportunity to reduce the total consideration paid, thereby improving overall operating performance.
Redemption of Debentures through Obligation Conversion
The maturity obligation also provides the possibility of conversion to a new type of obligation or participation in the corresponding company. The above-mentioned debenture conversion conditions shall be notified to the holder when the bond is issued.
This type of bond is called a convertible debenture. These debentures become new bonds, or companies can issue ordinary shares at face value, discounts, or even premiums.
According to Article 18(7) of the 2014, Companies Share Capital and Debenture Rules, in the year of company investment, at least 15% of the face value of the liabilities should be repaid. At some value. Produce within April 30th of the maturity date.
Finally, companies should also remember that they must open a DRR account with any financial institution approved by the Reserve Bank of India in the country.
Hope this article helped you understand the true meaning of Redemption of Debentures, Debenture Redemption Reserve and the methods of Debenture Redemption through lump-sum, installment or conversion payments.
Let us know your feedback in the comment section below!