Corporate Accounting and Financial Management · Accounting for Debentures

Conversion of Debentures into Shares: Journal Entries

Updated 11 October 2026 · Fact-checked

Conversion of debentures into shares means the company settles its debenture liability by issuing shares instead of paying cash. You debit Debentures (and any premium payable on redemption), credit Share Capital at face value, and credit Securities Premium for any excess. No cash moves.

Understand Conversion of Debentures into Shares

A debenture is a loan. When it is converted, the loan is extinguished and the lender becomes a shareholder. The company pays with shares, not cash. So the entry is a transfer from a liability account to share capital and, where needed, securities premium.

Conversion can happen under the terms of issue (a convertible debenture), or by a later agreement. Under Section 62(3) of the Companies Act, 2013, the Section 62 further-issue procedure (the offer to existing equity shareholders) does not apply to an increase in subscribed capital caused by exercising an option, attached to debentures or a loan, to convert them into shares. This exemption holds only if a special resolution approved those terms before the debentures were issued or the loan raised. It lifts the Section 62 offer procedure only; other legal requirements still apply.

Separately, under Section 62(4) the Government may direct that its debentures or loans be converted into shares in the public interest, on terms it considers reasonable, even if the original terms had no conversion option. This is a different route from Section 62(3) and does not depend on a special resolution passed before issue.

The key idea is value. Compare the amount of debentures being extinguished (including any premium payable on redemption) with the face value of the shares issued. If the shares are issued at a price above their face value, the excess goes to the securities premium account. Under Section 52(1), the premium received on shares, whether for cash or otherwise, must be transferred to a securities premium account.

There are two practical cases. Conversion at par: debenture value equals the value of shares issued, so no premium arises. Conversion at premium: shares are issued at more than face value, so Securities Premium is credited.

Conversion at a discount does not arise. The Companies Act, 2013 does not allow a company to issue shares at a discount, so the issue price must be at least the face value. If a question shows an issue price below face value, recheck the figures and follow the question's instructions.

The shares may be equity or preference. Section 43 describes the two kinds of share capital. Preference shares issued on conversion must be redeemable within the permitted period, because Section 55(1) bars irredeemable preference shares.

Key rules to remember

Amount extinguished: Debenture face value + premium payable on redemption (if any); This is the liability you clear. Check whether the question says the premium on redemption is payable at conversion. Any unwritten discount or loss on issue of debentures is not deducted here. Write it off by a separate entry as the question directs.
Number of shares issued: Number of shares = Amount converted ÷ Issue price per share; Issue price includes any premium. At par, issue price equals face value.
Share capital credited: Share Capital = Number of shares × Face value per share; Always credit face value to share capital, never the issue price.
Securities premium: Securities Premium = Number of shares × (Issue price − Face value); Credited when shares are issued above face value, as required by Section 52(1).
Basic conversion entry: Debentures A/c Dr. (amount converted); To Share Capital A/c (face value); To Securities Premium A/c (excess, if any); The issue price must be at least the face value, so expect conversion at par or at a premium.
Entry with intermediate account: Debentures A/c Dr.; To Debenture-holders' A/c. Then Debenture-holders' A/c Dr.; To Share Capital A/c; To Securities Premium A/c; Use this two-step form if the question asks for it or involves a premium on redemption.

How to solve Conversion of Debentures into Shares questions

Use the same method for every conversion question. Work in rupees first, then write entries.

1Read the terms: which debentures, how many, face value, and whether redemption premium is payable.
2Find the total amount of debentures being converted, adding any redemption premium payable.
3Find the issue price and face value of the new shares, and the type (equity or preference).
4Compute the number of shares: amount converted ÷ issue price. If the answer is not a whole number, look for a stated cash adjustment.
5Compute Share Capital (shares × face value) and Securities Premium (shares × premium). The issue price must be at least the face value; if it is lower, recheck the figures.
6Write the journal entry: debit Debentures (and Premium on Redemption if separately provided), credit Share Capital and Securities Premium. Check that debits equal credits.
7Write the narration, and handle any unwritten discount or loss on issue of debentures as the question directs.
8If asked, show the balance sheet effect: reduction in debentures, increase in share capital and securities premium.

Quickest way: Three-number shortcut

When to use it: Use it when the question is a plain conversion with a given ratio or issue price and you have little time.

Write three numbers: amount converted, shares issued, face value of those shares.
Credit Share Capital with shares × face value. The rest of the amount converted is the securities premium (credit).
Debit Debentures with the amount converted, then check that total credits equal that debit.

Common mistakes in Conversion of Debentures into Shares

Crediting the full amount converted to Share Capital when shares are issued at a premium.
Students forget that share capital always carries face value.
Fix: Divide the amount by issue price to get the number of shares, then multiply by face value for Share Capital. Put the rest in Securities Premium.
Calculating number of shares using face value instead of issue price.
Both prices appear in the question and the wrong one gets picked.
Fix: Number of shares = amount converted ÷ issue price. Underline the issue price in the question.
Ignoring premium payable on redemption of debentures.
Students treat conversion as a plain face-value swap.
Fix: If the debentures would have been redeemed at a premium, include the premium in the amount converted and clear the Premium on Redemption account.
Debiting Bank or Cash in the conversion entry.
Conversion is confused with redemption out of fresh issue proceeds.
Fix: In conversion no cash moves. Use only Debentures, Share Capital and Securities Premium.
Leaving unwritten discount or loss on issue of debentures untouched.
The balance appears in a separate account and is easy to miss.
Fix: Check whether the question says to write it off on conversion, and show that entry if asked.
Forcing a discount entry onto a conversion problem.
Students carry over older patterns of issue at a discount, or misread the issue price.
Fix: The Companies Act, 2013 does not allow a company to issue shares at a discount. Check that the issue price is at least the face value; if not, recheck the figures. Share Capital is always credited at face value.

Worked examples

Example 1

Shreya Textiles Ltd has 5,000 10% debentures of ₹100 each. 3,200 debentures are converted into equity shares of ₹100 each issued at ₹125. Pass the journal entry. (Ignore interest.)

Show the solution

Amount converted = 3,200 × ₹100 = ₹3,20,000.
Issue price = ₹125. Number of shares = ₹3,20,000 ÷ ₹125 = 2,560 shares.
Share Capital = 2,560 × ₹100 = ₹2,56,000.
Securities Premium = 2,560 × ₹25 = ₹64,000.
Check: ₹2,56,000 + ₹64,000 = ₹3,20,000, which equals the debit.

Answer: 10% Debentures A/c Dr. ₹3,20,000; To Equity Share Capital A/c ₹2,56,000; To Securities Premium A/c ₹64,000. (Being 3,200 debentures converted into 2,560 equity shares of ₹100 each at a premium of ₹25.)

Example 2

Kaveri Industries Ltd has ₹6,00,000 of 9% debentures of ₹100 each, redeemable at a premium of 5%. The debentures are converted into equity shares of ₹10 each issued at ₹12. The premium on redemption has not been provided for earlier and is to be provided out of profits. Pass the journal entries.

Show the solution

Debentures = ₹6,00,000. Premium payable on redemption = 5% × ₹6,00,000 = ₹30,000.
Amount converted = ₹6,00,000 + ₹30,000 = ₹6,30,000.
Number of shares = ₹6,30,000 ÷ ₹12 = 52,500 shares.
Share Capital = 52,500 × ₹10 = ₹5,25,000.
Securities Premium = 52,500 × ₹2 = ₹1,05,000.
Check: ₹5,25,000 + ₹1,05,000 = ₹6,30,000.
First entry: provide for the premium payable on redemption. Section 52(2)(d) allows the securities premium account to be used for this, but here the question directs that it be provided out of profits, so debit the Statement of Profit and Loss. Always follow the question's instruction.
Second entry: debit debentures and the premium payable, and credit Share Capital and Securities Premium for the shares issued.

Answer: (1) Statement of Profit and Loss Dr. ₹30,000; To Premium Payable on Redemption of Debentures A/c ₹30,000. (2) 9% Debentures A/c Dr. ₹6,00,000; Premium Payable 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.)

Exam tips

Write the working of the number of shares, share capital and premium clearly. Marks are given for working even if the final entry has a slip.
Always state the narration. It shows the examiner you know the facts of the conversion.
Read whether the redemption is at par or premium. This changes the amount converted.
For theory, link conversion to Section 62(3): the Section 62 further-issue procedure does not apply to an increase in subscribed capital caused by exercising a conversion option, but only if a special resolution approved the terms before the debentures were issued or the loan raised. Mention that Government-directed conversion under Section 62(4) is a separate route.
If shares are preference shares, mention that Section 55(1) does not allow irredeemable preference shares.

Practice questions from Accounting for 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.

CMA IntermediateConversion of Debentures into Shares

Conversion of Debentures into Shares: frequently asked questions

What is the journal entry for conversion of debentures into equity shares at par?

Debit Debentures and credit Equity Share Capital for the same amount. No premium arises because the value of the debentures equals the face value of the shares issued.

Where does the premium go when debentures are converted at a premium?

It is credited to Securities Premium Account. Section 52(1) requires the premium received on shares to be transferred to that account, and this applies whether the consideration is cash or otherwise.

Is cash involved in conversion of debentures?

No. The debenture liability is settled by issuing shares, so no cash is paid or received. If the question mentions a cash payment for fractions, show that separately.

Does conversion need shareholders' approval?

If the terms of issue included a conversion option approved earlier by a special resolution, Section 62(3) exempts the increase in capital caused by exercising that option from the Section 62 further-issue procedure. A conversion directed by the Government under Section 62(4) is a separate route and needs no such approval. In other cases, the usual Section 62 procedure for further issue applies.