— Kishore V, SME and ACW at Edumarz
- Debentures can be repaid both in terms of capital and earnings. The differences between these two strategies are as follows.
- Redemption of Debentures Out of Capital – When debentures are redeemed out of capital and no earnings are used to do so, this is referred to as redemption out of capital.
There is no need to transfer earnings to the Debenture Redemption Reserve in this circumstance (DRR).
It is important to remember that no company can redeem its debenture solely with cash because, according to the Securities and Exchange Board of India (SEBI) guidelines and Section 117C of the Company Act of 1956, a company must first create a DRR equal to 50% of the debentures issued before beginning any redemption process.
As a result, redeeming debentures only on the basis of capital is not conceivable since it lowers the value of assets.
There are exceptions in the following cases: I infrastructure firms (i.e., corporations that create, manage, and operate infrastructure facilities); and (ii) companies that issue debentures with maturities of up to 18 months.
In the case of convertible debentures and partially convertible debentures with a convertible component.
Debenture Redemption Out of Profits – When debentures are redeemed out of profit, no capital is used in the redemption process.
Profits from the Profit and Loss Appropriation Account are transferred to DRR before the debentures are redeemed.
According to the Securities and Exchange Boarder of India’s recommendations, the development of a DRR is required (SEBI).