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

Redemption of Debentures: Methods and Provisions under Section 71

Updated 10 October 2026 · Fact-checked

Redemption of debentures means repaying debenture holders as per the terms of issue. Methods are lump sum at maturity, instalments, purchase in the open market, and conversion into shares. Section 71 requires a Debenture Redemption Reserve out of profits where applicable. To solve problems, identify the method, pass the entries, and apply the reserve and investment rules.

Understand Redemption of Debentures: Methods and Provisions

A debenture is a debt instrument. The company must pay interest and redeem the debentures in accordance with the terms and conditions of their issue (Section 71(8)). So the terms of issue decide when and how you redeem.

There are four common methods:

Lump sum: the whole issue is repaid on one date, usually at maturity.
Instalments: a fixed part is repaid each year, often by draw of lots, so the outstanding amount falls over time.
Purchase in the open market: the company buys its own debentures from the stock market, either for immediate cancellation or to hold as own debentures, and may gain if the price is below face value.
Conversion: debentures are converted into shares, wholly or partly. Section 71(1) allows an issue with an option to convert, and such an issue must be approved by a special resolution at a general meeting.

Section 71(4) says that where debentures are issued, the company shall create a Debenture Redemption Reserve (DRR) out of the profits of the company available for payment of dividend. The amount credited to it cannot be used except for redeeming debentures. The Act leaves the quantum to the rules (Section 71(13)). The commonly taught rules are given below, and you should follow the percentages in your ICMAI study material. The DRR is an appropriation of profit. It is not a cash fund, so cash must be arranged separately, which is why the investment requirement exists.

Redemption out of capital means paying from the proceeds of a fresh issue of shares or debentures. Redemption out of profits means paying from cash generated by operations, backed by the DRR transfer from profits. Do not confuse this with preference shares, where Section 55 requires Capital Redemption Reserve. Section 71 sets no such reserve for debentures, and the DRR is the relevant one.

Other rules help in theory questions. Debentures cannot carry voting rights (Section 71(2)). A debenture trustee must be appointed if the offer is to more than five hundred persons (Section 71(5)). If the company fails to redeem on maturity or pay interest, the Tribunal may direct redemption on application (Section 71(10)).

Key rules to remember

Interest and redemption duty: Pay interest and redeem as per terms of issue (Section 71(8)); The terms of issue fix the method, date and any premium.
DRR source: DRR is created out of profits available for payment of dividend (Section 71(4)); Debit Statement of Profit and Loss or General Reserve, credit DRR. Use only for redemption.
DRR percentage (as commonly taught under the Rules): Public issue of listed NBFCs and others: as per Rules; check ICMAI material for the percentage of outstanding debentures; The Act does not fix the percentage. Use the figure given in the question or your study material.
Investment requirement (rule commonly taught): Invest or deposit in prescribed securities at least 15% of the debentures maturing in the year, before 30 April of that year; This is a Rules requirement, not in Section 71 text. Keep it in specified investments until redemption.
Own debentures cancelled: Profit on cancellation = Nominal value − Cost of purchase (ex-interest); Credit the gain to Capital Reserve. A loss goes to Statement of Profit and Loss.
Conversion: Shares issued = Debentures converted ÷ Issue price per share; Share capital is credited at nominal value, and any excess to Securities Premium.
Voting rights: No debentures carrying voting rights (Section 71(2)); Useful for theory questions.

How to solve Redemption of Debentures: Methods and Provisions questions

Use this order for any redemption question on the topic.

1Read the terms of issue: face value, premium or discount on redemption, method and date.
2Decide the source: fresh issue (capital), or profits and reserves.
3If DRR applies, compute the required amount from the percentage given, then transfer only the shortfall after considering the existing balance.
4Compute the investment requirement from the debentures maturing in the year, if the question mentions it.
5Pass entries in order: DRR creation, investment, redemption, and release of investment.
6For open market purchase, work out cost excluding accrued interest, then find the profit or loss on cancellation.
7For conversion, find the number of shares, then split between share capital and securities premium.
8Show the working notes and the final balances clearly for step marks.

Quickest way: Four-line check for debenture redemption

When to use it: Use it when time is short in a 14-mark question or an MCQ.

Method: lump sum, instalment, market purchase or conversion.
Premium or discount on redemption: provide for it before or at redemption.
DRR and investment: compute them only if the question states or implies them.
Gain or loss on own debentures: face value minus cost. Gain goes to Capital Reserve.

Common mistakes in Redemption of Debentures: Methods and Provisions

Treating DRR as a cash fund
The word reserve suggests money set aside.
Fix: DRR only restricts profits from distribution. Cash is protected through the investment entry.
Applying Capital Redemption Reserve rules to debentures
Preference share redemption is studied next to debentures.
Fix: Section 55 deals with preference shares and CRR. Section 71(4) deals with debentures and DRR.
Including accrued interest in profit on cancellation
The purchase price is cum-interest.
Fix: Split the price. Interest goes to the Interest account and only the ex-interest cost is compared with face value.
Transferring the full DRR percentage again when a balance already exists
Students ignore opening DRR.
Fix: Transfer only the shortfall in the required amount.
Forgetting the premium on redemption or the loss on issue
Attention stays on the face value.
Fix: Compute the total payable on the redemption date and write off any loss on issue as per the terms.
Crediting the gain on cancellation to the Profit and Loss account
It looks like income.
Fix: A gain on cancelled own debentures is a capital profit, so credit Capital Reserve.

Worked examples

Example 1

A company redeems ₹10,00,000 of 9% debentures at par on maturity. It has a DRR balance of ₹2,50,000. Show the entries, assuming all DRR is required to be retained until redemption, and that the entire ₹10,00,000 is repaid from bank.

Show the solution

Step 1: Redemption entry: Debentures A/c Dr ₹10,00,000 to Debentureholders A/c ₹10,00,000.
Step 2: Payment: Debentureholders A/c Dr ₹10,00,000 to Bank A/c ₹10,00,000.
Step 3: The DRR is no longer required. Transfer it: DRR A/c Dr ₹2,50,000 to General Reserve A/c ₹2,50,000.
Step 4: Check: liabilities fall by ₹10,00,000 and bank falls by the same amount. Reserves are only reclassified.

Answer: Debentures ₹10,00,000 are repaid in cash, and the DRR of ₹2,50,000 is transferred to General Reserve.

Example 2

A company purchased its own 1,000 debentures of ₹100 each in the open market at ₹96 each, ex-interest, and cancelled them immediately. Accrued interest paid was ₹1,500. Pass the entries.

Show the solution

Step 1: Cost ex-interest = 1,000 × ₹96 = ₹96,000.
Step 2: Total paid = ₹96,000 + ₹1,500 = ₹97,500.
Step 3: Purchase entry: Own Debentures A/c Dr ₹96,000 and Debenture Interest A/c Dr ₹1,500 to Bank A/c ₹97,500.
Step 4: Face value = 1,000 × ₹100 = ₹1,00,000. Profit = ₹1,00,000 − ₹96,000 = ₹4,000.
Step 5: Cancellation: Debentures A/c Dr ₹1,00,000 to Own Debentures A/c ₹96,000 and to Capital Reserve A/c ₹4,000.

Answer: The profit on cancellation is ₹4,000, credited to Capital Reserve, and ₹1,500 is charged as interest.

Exam tips

In MCQs, check whether the question is about debentures or preference shares before choosing DRR or CRR.
Write the section number only when sure: Section 71 for debentures, Section 55 for preference shares.
Always show the working for the gain or loss on own debentures. Marks are given for the working.
In theory answers, name the four methods and give one line for each, then mention DRR and investment.
Use the percentages provided in the question. Do not assume a percentage if it is not stated.

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

Redemption of Debentures: Methods and Provisions in other exams

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

Redemption of Debentures: Methods and Provisions: frequently asked questions

What is the Debenture Redemption Reserve?

It is a reserve created out of profits available for payment of dividend, as required by Section 71(4). It cannot be used except to redeem debentures. It does not hold cash by itself.

What is the 15 percent investment rule for debentures?

Under the Rules, a company is commonly taught to invest or deposit at least 15% of the debentures maturing in a year in prescribed securities before a set date in that year. It is not stated in Section 71 itself. Check your ICMAI material for the exact conditions.

What is the difference between redemption out of capital and out of profits?

Redemption out of capital uses the proceeds of a fresh issue. Redemption out of profits uses internal funds, with a DRR transfer from profits. The DRR rule applies to the profit-based route.

Can debentures carry voting rights?

No. Section 71(2) says no company shall issue debentures carrying any voting rights.