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Corporate Accounting and Auditing · Redemption of Preference Shares, Issue and Redemption of Debentures

Conversion of Debentures into Equity Shares: Journal Entries

Updated 10 October 2026 · Fact-checked

Conversion of debentures into shares means the company discharges its debenture liability by issuing shares instead of paying cash. Find the amount due to debenture holders, divide it by the issue price per share to get the number of shares, then debit debentures and credit share capital at face value and securities premium for any premium.

Understand Conversion of Debentures into Shares

Debentures are a liability. The company must repay them on the due date. Instead of paying cash, the company can offer debenture holders shares in return. This is redemption by conversion. No cash moves (except for small fractions, if any), so the company's cash position is not hurt.

Conversion can be compulsory or optional. The terms of issue of the debentures usually say so. Debentures may be converted into equity shares or into preference shares. The terms also fix the ratio or the price at which shares are issued.

The key idea is a swap of values. The amount due to the debenture holders (face value plus any premium payable on redemption) is the value given up by the company. The shares issued are the value received by the debenture holders. If the shares are issued at par, the amounts match and nothing else is needed. If shares are issued at a premium, the debenture holders get fewer shares, and the difference goes to securities premium.

Under Section 52 of the Companies Act, 2013, where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate premium received must be transferred to the securities premium account. Conversion of debentures is an issue of shares for consideration other than cash, so the premium rule applies. Section 62(3) also says the rights-issue rules do not apply where the increase in capital comes from exercising an option attached to the debentures to convert them into shares, if the terms were approved by a special resolution in general meeting before the debentures were issued.

A company cannot issue shares at a discount (Section 53), except sweat equity shares. This rule is not in the extracts of the Act used for this page, but you must know it. So the issue price on conversion is never below the face value of the share. If a question gives an issue price below face value, do not build entries on it. State that an issue of shares at a discount is not permitted. Always follow any other instruction in the question.

Key rules to remember

Amount payable to debenture holders
Amount due = Face value of debentures + Premium payable on redemption (if any) ± Accrued interest only if the question says it is settled in shares
Interest is normally paid in cash. Convert only the principal amount unless told otherwise.
Number of shares issued (price given)
Number of shares = Amount due ÷ Issue price per share
Issue price = face value of share + premium (if any). It cannot be below face value.
Number of shares issued (ratio given)
Number of shares = Number of debentures × shares per debenture
Use when the question gives a ratio such as 5 shares for every 2 debentures.
Securities premium on conversion
Securities premium = Number of shares × premium per share
Credit to Securities Premium Account as required by Section 52(1).
Core entry
Debentures A/c Dr. (face value); Premium on redemption payable Dr. (if any) | To Equity Share Capital (face value of shares) | To Securities Premium (if premium)
Total debits must equal total credits.

How to solve Conversion of Debentures into Shares questions

Use this method for any question on conversion of debentures into equity or preference shares.

  1. 1Read the terms: which debentures convert, in full or in part, into which class of shares, and at what price or ratio.
  2. 2Find the amount due to debenture holders: face value of the debentures being converted, plus any premium payable on redemption.
  3. 3Find the issue price of one share: face value plus premium, if any. It cannot be below face value.
  4. 4Compute the number of shares: amount due ÷ issue price per share (or use the given ratio). Check that the answer is a whole number; if not, see whether the question pays the fraction in cash.
  5. 5Split the credit: share capital at face value for all shares issued; securities premium for the premium part.
  6. 6Pass the entry: debit Debentures (and Premium on Redemption of Debentures, if any); credit Share Capital and Securities Premium. Show the transfer of interest or any cash paid separately.
  7. 7Check that debits equal credits, and then show the balance sheet effect if asked: debentures down, share capital and securities premium up.

Quickest way: Three-line shortcut for conversion

When to use it: Use when the question asks only for the journal entry or the number of shares and has no further complications.

  1. Line 1: Amount due ÷ issue price = number of shares.
  2. Line 2: Number of shares × face value = share capital credit; number of shares × premium = securities premium credit.
  3. Line 3: Debit debentures (and premium on redemption, if any) with the amount due. Check that Share Capital + Securities Premium = Amount due.

Common mistakes in Conversion of Debentures into Shares

  • Crediting share capital with the whole amount due when shares are issued at a premium.

    Students forget that the premium is a separate credit and treat the issue price as the face value.

    Fix: Always credit share capital at face value only. Put the premium in Securities Premium, as Section 52(1) requires.

  • Dividing the debenture face value by the share face value to get the number of shares, ignoring the issue price.

    The issue price is mentioned in the question as a separate premium and is overlooked.

    Fix: Divide by the issue price (face value plus premium), not by face value.

  • Ignoring premium payable on redemption of debentures.

    Students focus on the share side and forget that debenture holders are owed more than face value.

    Fix: If debentures are redeemable at a premium, the amount due is higher. Debit Premium on Redemption payable too, and then compute shares on the larger amount.

  • Treating a conversion as a cash redemption and passing entries through the bank account.

    Students memorise cash-redemption entries and apply them mechanically.

    Fix: Conversion involves no cash. Credit shares directly. Use the bank only for fractional shares or interest settled in cash, if the question says so.

  • Passing a 'Discount on Issue of Shares' entry for an issue price below face value.

    Students carry over discount entries from other topics and treat a discount issue as routine.

    Fix: A company cannot issue shares at a discount (Section 53), except sweat equity. Use par or premium issue prices only. If a question shows a discount, say the issue is not permitted.

  • Converting the whole issue when the question converts only part.

    Students skim the question and use the total debentures figure.

    Fix: Underline the number or proportion converted. Show the balance as redeemed in cash or still outstanding, as the question says.

Worked examples

Example 1

Sundaram Industries Ltd has ₹10,00,000 of 9% debentures due for redemption. The debenture holders are given fully paid equity shares of ₹100 each, issued at a premium of 25%. Pass the journal entry and compute the shares issued.

Show the solution
  1. Amount due to debenture holders = ₹10,00,000 (no premium on redemption).
  2. Issue price per share = ₹100 + ₹25 = ₹125.
  3. Number of shares = ₹10,00,000 ÷ ₹125 = 8,000 shares.
  4. Share capital = 8,000 × ₹100 = ₹8,00,000.
  5. Securities premium = 8,000 × ₹25 = ₹2,00,000.
  6. Check: ₹8,00,000 + ₹2,00,000 = ₹10,00,000, which equals the amount due.
  7. Entry: 9% Debentures A/c Dr. ₹10,00,000 | To Equity Share Capital A/c ₹8,00,000 | To Securities Premium A/c ₹2,00,000 (being debentures converted into 8,000 equity shares of ₹100 each at ₹125).

Answer: 8,000 equity shares are issued. Debit 9% Debentures ₹10,00,000; credit Equity Share Capital ₹8,00,000 and Securities Premium ₹2,00,000.

Example 2

Kaveri Textiles Ltd has ₹6,00,000 of 10% debentures of ₹100 each, redeemable at a premium of 5%. The debentures are converted into equity shares of ₹10 each issued at a premium of ₹2 per share. Pass the journal entry for conversion.

Show the solution
  1. Face value of debentures = ₹6,00,000.
  2. Premium payable on redemption = 5% × ₹6,00,000 = ₹30,000.
  3. Amount due = ₹6,00,000 + ₹30,000 = ₹6,30,000.
  4. Issue price per share = ₹10 + ₹2 = ₹12.
  5. Number of shares = ₹6,30,000 ÷ ₹12 = 52,500 shares.
  6. Share capital = 52,500 × ₹10 = ₹5,25,000.
  7. Securities premium = 52,500 × ₹2 = ₹1,05,000.
  8. Check: ₹5,25,000 + ₹1,05,000 = ₹6,30,000, which equals the amount due.
  9. Entry: 10% Debentures A/c Dr. ₹6,00,000 | Premium on Redemption of Debentures A/c Dr. ₹30,000 | To Equity Share Capital A/c ₹5,25,000 | To Securities Premium A/c ₹1,05,000 (being debentures converted into 52,500 equity shares of ₹10 each at ₹12).

Answer: 52,500 equity shares are issued. Debits: Debentures ₹6,00,000 and Premium on Redemption ₹30,000 (total ₹6,30,000). Credits: Equity Share Capital ₹5,25,000 and Securities Premium ₹1,05,000 (total ₹6,30,000).

Exam tips

  • Write the amount due and the issue price first. Most step marks sit in these two lines.
  • Always show the check: share capital plus securities premium must equal the amount due.
  • Read for hidden items: premium on redemption, interest due, part conversion, fractions paid in cash, and preference shares instead of equity.
  • Quote Section 52 when you credit securities premium. One line of law helps in a written answer.
  • In MCQs, the usual traps are dividing by face value instead of issue price and forgetting premium on redemption. Compute the number of shares before looking at the options.

Practice questions from Redemption of Preference Shares, Issue and Redemption of Debentures

Conversion of Debentures into Shares in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Conversion of Debentures into Shares: frequently asked questions

How do you calculate the number of shares issued on conversion of debentures?

Divide the amount due to debenture holders by the issue price per share. The amount due includes premium on redemption, if any. The issue price is the face value of the share plus any premium.

Where does the premium on shares issued on conversion go?

It is credited to the Securities Premium Account. Section 52(1) of the Companies Act, 2013 requires a sum equal to the premium received on shares issued, whether for cash or otherwise, to be transferred to this account.

Is conversion of debentures into shares treated as a rights issue?

No, if the conditions are met. Section 62(3) says the section on further issue does not apply where capital rises through exercise of an option attached to debentures to convert them into shares. The terms of that option must have been approved by a special resolution in general meeting before the debentures were issued.

Is cash needed when debentures are converted into shares?

Normally not. The debenture liability is discharged by issuing shares. Cash is used only for items such as accrued interest or fractional shares, when the question says so.

Can debentures be converted into shares issued at a discount?

No. A company cannot issue shares at a discount (Section 53), except sweat equity shares. So the conversion price is at par or at a premium. If a question gives a price below face value, state that such an issue is not permitted.