Debentures (Redemption) Flashcards
Time of redemption of debentures?
Amount of redemption?
Sources of redemption?
Normally on due date; but if may authorised by the terms of issue redeem before the due date.
As per terms of issue.
Out of profit (part of profit: 10% DRR; only profit: 100% of the value of outstanding debentures to DRR; non listed companies) (must be taken out of profits available for payment of dividend)
Out of capital (financially sound companies; listed company not required to create DRR)
Out of fresh issue (from money raised through equity)
Conversion (to equity shares, or, to other class of debentures; no involvement of fund)
Sale of fixed assets
Types of Expenditure
Types of capital expenditure
Capital, revenue, deferred revenue.
purchase of asset
Construction of asset
Installation charges of an asset Expenditure to increase capacity to generating income from an asset
Methods of redemption?
Methods of creation of DRR?
Lump some payment
Drawing of lots
Purchase of own debentures from open market
- In lump sum.
- In parts but before The Redemption of debentures (opening balance, if any, in DRR account is considered and balance amount is transferred to DRR account.
Rule of debentures
Subsection 1
Subsection 4
Section 71
Redemption should be done at a certain point of time
DRR should be made if company is not listed and the amount should only be used for the redemption purpose
(SEBI guidelines refer to the same)
Companies Rule 2014:
Rule 18 (1)
Rule 18 (7)
Rule 18 (7) (b)
Companies cannot issue secured debentures if redemption period is beyond 10 years.
Exception : infrastructure companies 30 years
Creation of DRR
- amount transferred to DRR should be out of profits available for payment of dividend
- specifies the amount to be transferred to DRR according to different types of companies
- minimum amount should be balance of DRR.
DRR is created for non convertible or convertible debentures?
Non convertible
And partly Non convertible
Which organisations have no compulsion to create DRR, name a few?
Organisations controlled by Banking Regulation Act or RBI
- All India Financial Institutions
- National housing Bank registered Housing Finance Companies
- Banking companies for both public and privately placed dentures
- Non Banking Finance Companies registered by RBI
- Other Financial Institutions (section 2
(2) of companies act, 2013)
DRR created for unlisted companies?
10% of the value of the outstanding debentures.
In case of convertible debentures, amount shall be set aside to DRR for non convertible part of debentures.
What kind of Reserve is DRR?
DRR can be set aside out of which Reserves?
Specific
General reserve
Dividend equalisation reserve
Surplus balance in statement of profit and loss
(since these can be used to pay out dividend)
Date of transferring the amount to DRR?
Disclosure of DRR in the balance sheet?
If date is given, then entries will be passed on that date, if not, it may be passed on any date before the Redemption of debentures.
Shareholders’ funds
Reserves and Surplus
Accounting entries for DRR?
- For transferring amount to DRR?
- Transfer of DRR to General reserve?
a. Proportionate amount after every Redemption.
b. Full amount after redemption of all the debentures.
General reserve A/c Dr.
Dividend equalisation reserve A/c Dr.
Surplus A/c Dr.
To Debentures Redemption Reserve
- a. More appropriate option since by transferring amount from DRR to general reserve, the transferred amount becomes a free reserve for the company.
* in the absence of instruction in the question option a. is preferred.
For both a. And b.
Debentures Redemption Reserve A/c Dr.
To General Reserve A/c
Why DRR transferred to general reserve?
To give effect to earlier reduction in profit.
Debentures redemption investment:
Companies rule?
Amount?
Companies exempted from creating DRI?
Have to create DRI?
Rule 18 (7) (b) Companies Rules 2014
Not less than 15% of nominal value of debentures to be redeemed by 31st march of next year or before 30th April of current year.
(DRI can be made in earlier year or years)
- All India Financial Institutions (regulated by RBI)
- Banking companies for both public and privately placed dentures
- Housing Finance companies (unlisted)
- Non Banking Finance Companies registered by RBI (unlisted)
- Other Financial Institutions (section 2
(2) of companies act, 2013)
Listed companies
Unlisted except NBFC and HFC
Fund Vs Reserves
Fund : invested/utilised in outside activities
Reserve : invested internally
Security specified for (DRI) investment are
?
- Deposits with scheduled bank, free from any charge.
- Unencumbered securities of the central government or state government.
- Unencumbered securities mentioned in sub clauses (a) to (d) to (ee) of Section 20 of Indian Trust Act 1882.
- Unencumbered bonds issued by a company which is notified under Section 20(f) of Indian Trust Act 1882.
Nature of premium on redemption of debentures account?
Liability
Realisation of DRI (Rule 18 (7)(b))?
- Realise the investment at the time of every redemption and invest again an amount that is not less than 15% of the value of outstanding debentures.
- Not realise the investment at the time of every redemption but instead carry it forward as an investment in DRI for subsequent redemptions of debentures.
Situations when debentures are redeemed in parts in more than one year and the company carries forward the earlier investment?
- Redemption of debentures in next year is same as it is in the current year
- DRI not realised - Redemption of debentures in the next year is more than the redemption of debentures in the current year
- DRI not realised. Further invest amount equal to 15% of difference amount. - Redemption of debentures in the next year is less than the redemption of debentures in the current year
- DRI realised to the extent of amount in excess of 15% of the debentures to be redeemed in next year.
Realisation of DRI when redemption of debentures in installments during the year?
Amount of DRI proportionate to each redemption is realised.
