Issue and Redemption of Debentures
This chapter shows you how companies borrow money by issuing debentures — and how to record every step, from the day the debenture is sold to the day the loan is repaid.
Every large Indian company — Tata, Infosys, ONGC — raises long-term funds through debentures, and auditors, bankers, and investors read these exact journal entries in published Balance Sheets; mastering this chapter also makes you exam-ready for the high-mark numericals that appear in every CBSE board paper.
Concept
Lots of students think…
"Debenture-holders and shareholders are basically the same — both are investors who put money into the company."
Actually…
Shareholders own the company and share its profits or losses. Debenture-holders are lenders who receive fixed interest regardless of profit, have no voting rights, and are repaid before shareholders if the company winds up.
By the end of this, you will understand how companies borrow money by issuing debentures — what the different prices mean, how the accounts are recorded, and how the loan is eventually paid back.
What is a debenture?
A debenture is a borrowing certificate. When a company issues a debenture, it is saying: 'You lend us money, we will pay you fixed interest every year, and we will return your money on a set date.' The person who holds the debenture is a lender — called a debenture-holder — not an owner of the company. They get no voting rights and no share of the company's profits. But they do get their fixed interest even if the company makes a loss.
A textile factory in Delhi needs ₹5 crore to buy new looms. Instead of giving away ownership by issuing shares, the company issues debentures to investors at 9% interest per year, repayable after 5 years. The investors get ₹9 lakh interest every year — whether the factory profits or not.
Debenture-holder vs shareholder
A shareholder owns a piece of the company and shares in its profits and losses. A debenture-holder is just a creditor — like a bank the company borrowed from. If the company winds up, debenture-holders get paid back before shareholders. Shareholders take the risk; debenture-holders take a salary-like fixed return.
Suppose Infosys earns a huge profit this year — shareholders get higher dividends. But a debenture-holder in Infosys gets the same fixed 8% coupon no matter how large the profit is. They traded the upside for safety.
Issue price: par, discount, premium
A company can sell debentures at three prices. At par: the buyer pays exactly the face value (₹100 debenture costs ₹100). At a discount: the buyer pays less than face value (₹95 for a ₹100 debenture) — the company does this to attract buyers when conditions are tough. At a premium: the buyer pays more (₹110 for a ₹100 debenture) — when the company is well-known or the interest rate offered is attractive. Crucially, the Debentures Account is always credited at face value, not at the price actually paid.
A pharma company in Hyderabad issues ₹1,000 debentures at ₹980 each (a ₹20 discount) to raise cash fast. The company collected ₹980 cash per debenture, but still credits 'Debentures Account' for ₹1,000. The ₹20 difference goes to a separate 'Discount on Issue of Debentures' account.
Spreading the discount over time
When debentures are issued at a discount, that discount is a borrowing cost — but you do not write it all off in Year 1. You spread it equally across the full life of the debenture. Each year, one equal slice of the total discount is charged to Finance Costs (in Profit & Loss). By the final year, the balance reaches zero. This follows the Matching Concept: the cost of borrowing belongs to the years you actually used the borrowed money.
The Hyderabad pharma company issued debentures at a total discount of ₹1 lakh. The debentures run for 5 years. So every year the accounts team charges ₹20,000 (₹1 lakh ÷ 5) as a finance cost, reducing the 'Discount on Issue of Debentures' balance by ₹20,000 each year until it hits zero.
Issue for something other than cash
Sometimes a company issues debentures not to collect cash but to pay off a debt. For example, instead of paying a supplier in cash, the company hands over debenture certificates. The debentures are still recorded at face value, and any difference between what was owed and the face value is treated as a discount on issue — exactly the same accounting logic applies.
A factory owes a machinery supplier ₹28 lakh. Rather than paying in cash, it issues debentures of ₹30 lakh face value to settle the bill. The supplier's account is debited ₹28 lakh, Discount on Issue of Debentures is debited ₹2 lakh, and Debentures Account is credited ₹30 lakh.
Four ways to repay debentures
Redemption means paying back the debenture loan. There are four main ways. Lump sum: repay all holders together on the maturity date — simplest. By instalments: repay in chunks over time, often using a lottery to pick which debentures are repaid each year. By open-market purchase: the company buys its own debentures on the stock exchange before maturity, usually when the price is low. By conversion: instead of cash, debenture-holders receive equity shares — they switch from being lenders to being owners.
ONGC issued debentures in 2019 redeemable in 2024. On the maturity date it transferred money directly to debenture-holders' bank accounts (lump sum). A smaller company might draw lots each year and repay a batch of holders, spreading the cash outflow so it does not hit the company all at once.
Securities Premium — a separate reserve
When debentures are issued at a premium, the extra amount collected above face value goes into a special account called Securities Premium Reserve. This is shown under 'Reserves and Surplus' in the Balance Sheet and is NOT automatically cancelled when the debentures are repaid. If the company agrees to pay a premium at the time of redemption, that is a completely separate payment — it goes into a 'Premium on Redemption of Debentures' account. The two are independent of each other.
A company issues ₹100 debentures at ₹110 — the extra ₹10 goes to Securities Premium Reserve. Five years later it redeems the debentures and pays an extra ₹5 as a redemption bonus. That ₹5 is debited separately and has nothing to do with the ₹10 premium collected at the time of issue.
Notes
The full picture
When a company like a Delhi-based textile manufacturer needs ₹5 crore to buy new machinery, it has two broad choices: issue shares (and give away ownership) or borrow money. Issuing debentures is the borrowing route. A debenture is a certificate that says, 'the company owes you this money at a fixed interest rate, and will repay you on a set date.' The person who holds the debenture is called a debenture-holder — and crucially, they are a creditor of the company, not an owner. They get no voting rights, no claim on profits. But they do get fixed interest (called the coupon rate) every year, rain or shine, whether the company makes a profit or a loss.
A company can issue debentures at three prices. Issued at par means the buyer pays exactly the face value — a ₹100 debenture costs ₹100. Issued at a discount means the company accepts less than face value — say ₹95 for a ₹100 debenture — to attract buyers when market conditions are tough. Issued at a premium means the buyer pays more — ₹110 for a ₹100 debenture — when the company has a strong reputation or offers a high coupon rate. The accounting rule is: always credit the Debentures account at face value. If there is a discount, debit a separate account called 'Discount on Issue of Debentures.' If there is a premium, credit a separate account called 'Securities Premium Reserve' (shown under Reserves and Surplus in the Balance Sheet).
Discount on Issue of Debentures is a deferred expense — think of it as a prepaid borrowing cost. You do not write off the entire ₹5,000 discount in Year 1. Instead, you spread it equally across the life of the debenture using the straight-line method. If a ₹1,00,000 debenture was issued at ₹98 (discount ₹2,000) and has a 5-year life, you write off ₹400 every year. Each year you debit Finance Costs (Profit & Loss) and credit Discount on Issue of Debentures. By the final year, the balance reaches zero — and in that final year, any remaining unamortised discount must be fully written off before redemption. The Matching Concept is the reasoning: the cost of borrowing should be charged in the years you actually enjoyed the borrowed funds.
Sometimes a company does not pay cash for the debentures it issues. Instead, it issues debentures as payment for something else — this is called issue for consideration other than cash. The most common scenario in Indian business is acquiring machinery or settling a creditor. For example, if a company issues ₹30 lakh of debentures to pay off a supplier to whom it owes ₹28 lakh, the entry is: Debit the supplier's account for ₹28 lakh, Debit Discount on Issue of Debentures for ₹2 lakh, and Credit Debentures Account for ₹30 lakh. The debentures are recorded at face value; the gap between what was owed and the face value is the discount, treated like any other discount on issue.
Redemption means repaying the debentures. There are four main methods you need to know. Lump sum redemption: the company pays back all debenture-holders together on the fixed maturity date — the simplest method. Redemption by instalments: the company repays in chunks over time, often by drawing lots to decide which debentures are repaid each year. Redemption by purchase in the open market: the company buys its own debentures from the stock exchange before maturity, usually when prices are low. Redemption by conversion: the debentures are converted into equity shares instead of being repaid in cash — the debenture-holder becomes a shareholder. The basic journal entry at redemption is the same for most methods: Debit Debentures Account (the liability disappears) and Credit Bank Account (cash paid out). If there is a premium payable on redemption, that is an additional cash payment — it is recorded separately from the Securities Premium Reserve that was credited at issue, because the two items arise from completely different transactions and are treated independently in the accounts.
An Indian example
Priya's father runs a mid-sized pharmaceutical company in Hyderabad. In April 2024 the company needed ₹50 lakh to import new tablet-pressing machines. Rather than taking a bank loan at 12% interest, the CFO decided to issue 5,000 debentures of ₹1,000 face value at ₹980 each (a ₹20 discount per debenture), with a 9% coupon rate, redeemable after 5 years. The company collected ₹49 lakh in cash, debited 'Discount on Issue of Debentures' for ₹1 lakh, and credited 'Debentures Account' for ₹50 lakh. Every 31 March, the accounts team writes off ₹20,000 (₹1 lakh ÷ 5 years) as a finance cost. When Priya showed her father the Balance Sheet, she pointed out that the net carrying amount of the debentures starts at ₹49 lakh and climbs by ₹20,000 each year, reaching exactly ₹50 lakh on the redemption date — the moment the company wires the money back to debenture-holders. Her father was impressed: 'You actually understand what we did.'
Key concepts covered
- Issue at par/discount/premium
- Issue for consideration other than cash
- Redemption methods
Common misconceptions to watch for
- Wrong belief: 'Debenture-holders and shareholders are basically the same — both invest in the company.' Correction: They are fundamentally different. Shareholders own the company and share its profits (or losses). Debenture-holders are lenders — they receive a fixed interest payment regardless of profit, have no voting rights, and must be repaid before shareholders if the company winds up.
- Wrong belief: 'The entire discount on issue should be charged to Profit & Loss in the year the debentures are issued.' Correction: The discount is a deferred expense that must be amortised (spread) equally over the life of the debenture. Only each year's proportionate share is charged to Finance Costs; the unamortised balance sits on the Balance Sheet as a fictitious asset until fully written off by the final year.
- Wrong belief: 'The Securities Premium Reserve credited when debentures are issued at a premium must be written off when the debentures are redeemed.' Correction: Securities Premium Reserve (SPR) is a statutory reserve that appears under 'Reserves and Surplus' in the Balance Sheet — it is not the same as a Capital Reserve. SPR is not automatically written off at redemption. Any premium payable on redemption is a completely separate cash payment recorded through a 'Premium on Redemption of Debentures' account; it does not offset the Securities Premium Reserve. The two arise from different transactions and are accounted for independently.
Questions
Dharti Manufacturing Ltd., a Delhi-based company, issues ₹1,00,000 debentures with a face value of ₹100 each at ₹98 (at a discount) with a coupon rate of 8% per annum. The debentures are to be redeemed after 5 years at par. The company's financial year ends on 31 March. Pass the journal entries for the issue of debentures on 1 April 2024 and the entry for amortisation of discount on 31 March 2025 (first year). Show the relevant Balance Sheet extract on 31 March 2025.
- 1Calculate the total issue price and the total discount on the issue.
Number of debentures = ₹1,00,000 ÷ ₹100 = 1,000 Issue price per debenture = ₹98 Total cash received = 1,000 × ₹98 = ₹98,000 Total discount = ₹1,00,000 − ₹98,000 = ₹2,000
When debentures are issued at a discount, the company receives less cash than the face value. This ₹2,000 difference is a deferred expense that must be amortised over the debenture's life, not charged entirely in Year 1. This follows the Matching Concept: the cost of borrowing must be spread over the period the money is borrowed.
Question 1 of 5 · easy
Ananya owns 100 debentures of ₹100 face value issued by Indian Steel Ltd. Her friend says, 'You own part of the company now!' Is Ananya's friend correct?
Quiz
Test yourself — pick an answer, then hit "Check" to see the explanation and your running score.
Question 1 of 5 · easy
Ananya owns 100 debentures of ₹100 face value issued by Indian Steel Ltd. Her friend says, 'You own part of the company now!' Is Ananya's friend correct?
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