What is Redemption of Debentures?
Redemption of debentures refers to payment of the amount of debentures by the enterprise. When debentures are reclaimed, liability on account of debentures is being discharged. To put it in other words, the amount of capital needed for redemption of debentures is large and, hence, economic enterprises make adequate provision out of gains and accrue capital to reclaim debentures. There are 4 ways by which the debentures can be reclaimed. Namely :
- Payment in lump sum
- Payment in instalments
- Purchase in the open market
- By conversion into shares or new debentures
- Payment in lump sum : The enterprise reclaims the debentures by paying the fund in lump sum (roundsum) to the debentureholders during the maturity hereof as per the terms and conditions of issue.
- Payment in instalments : Under this method, usually redemption of debentures is paid in instalments on the particular date during the time in the position of the debentures. The total amount of debenture liability is being divided by the total number of years. This must be noted that the authentic debentures reclaimable are recognised by the sources of drawing the required number of lots out of the debentures outstanding for the payment.
- Purchase in open market: When an enterprise buys its own debentures for the aim of cancellation, such an act of buying and cancelling the debentures comprises redemption of debentures by purchase in the open marketplace.
- Conversion into shares or new debentures : An enterprise can reclaim its debentures by transforming them into new class of debentures or shares. If debentureholders find that the proffer is useful to them, they can exercise their right of transforming their debentures into new class of debentures or shares. These new shares or debentures can be either circulated at a premium, at a discount or at par. It may be noted that this method is applicable only to convertible debentures.
The above mentioned is the concept, that is elucidated in detail about the Redemption of Debentures for the class 12 Commerce students. To know more, stay tuned to BYJU’S.