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Corporate Accounting and Financial Management · Accounting for Debentures

Redemption of Debentures: Methods and Provisions

Updated 11 October 2026 · Fact-checked

Redemption of debentures means repaying debenture-holders as per the terms of issue. A company can redeem in a lump sum, in instalments (often by draw of lots), by purchase in the open market, or by conversion into shares. Section 71 of the Companies Act, 2013 governs the debenture redemption reserve and the terms of repayment.

Understand Redemption of Debentures: Methods and Provisions

A debenture is a loan taken by a company. Redemption is the repayment of that loan. The terms of issue fix when and how you repay, and whether you pay at par, at a premium or at a discount.

Section 71(8) says the company must pay interest and redeem the debentures in accordance with the terms and conditions of their issue. If it fails on maturity or on interest, the Tribunal can direct immediate redemption on the application of debenture-holders or the debenture trustee (section 71(10)).

There are four main methods:

  • Lump sum: the whole issue is repaid at one date, usually maturity.
  • Instalments: a part is repaid each year. The debentures to be repaid are often chosen by draw of lots.
  • Purchase in the open market: the company buys its own debentures from the market, and may cancel them or hold them as investment. This is often done to use surplus funds or to buy at a price below par.
  • Conversion: debentures are converted into shares, wholly or partly. Section 71(1) allows this only if the terms of issue gave the option, and the issue with a conversion option must be approved by a special resolution at a general meeting.

Section 71(4) requires the company to create a debenture redemption reserve (DRR) out of profits available for payment of dividend. The amount credited cannot be used except for redeeming debentures. The quantum of DRR and the investment or deposit rules are left to the Rules under section 71(13). Study the Rules in your ICSI material for the exact percentages, and for which classes of company are covered.

In the books, redemption closes the debenture liability. If redemption is at a premium, the premium is a loss to the company. If you redeem out of profits, you transfer the profit to DRR first. The DRR is then transferred to the general reserve once the debentures are redeemed.

Key rules to remember

Redemption at par
Debentures A/c Dr (face value); To Bank A/c
Use when the terms say redemption at par. Pay face value.
Redemption at premium
Debentures A/c Dr (face value); Premium on Redemption of Debentures A/c Dr; To Bank A/c (face value + premium)
If the premium was provided for at issue, it already sits as a liability. Then debit that account instead.
Purchase in open market
Profit or loss on cancellation = Face value cancelled − Cost paid
Cost lower than face value gives a gain, which is credited to Capital Reserve or as the question's treatment directs. Cost higher gives a loss.
Redemption by instalments
Debentures redeemed each year = Total issue ÷ Number of instalments
Under draw of lots the numbers are chosen at random. Paid debentures are removed from the balance.
Section 71(4) DRR
DRR is created out of profits available for payment of dividend; used only to redeem debentures
Transfer from Profit and Loss A/c to DRR A/c. The quantum is fixed by the Rules under section 71(13), so use the percentage given in the question.
Conversion
Debentures A/c Dr; To Share Capital A/c; To Securities Premium A/c (if shares issued above par)
Needs a conversion option in the terms of issue and a special resolution under section 71(1).
Voting rights
Debentures carry no voting rights
Section 71(2): no company shall issue debentures with voting rights.

How to solve Redemption of Debentures: Methods and Provisions questions

Use this order for any redemption question. It keeps entries complete and stops you from missing the reserve entry.

  1. 1Read the terms of issue: face value, redemption date, par or premium, and the method of redemption.
  2. 2Check the DRR instruction. Note the percentage and the profit available. Credit DRR from profits, using the figure given in the question.
  3. 3Pass the entry to transfer profit to DRR (Profit and Loss A/c Dr; To Debenture Redemption Reserve A/c).
  4. 4Pass the redemption entry for the chosen method: lump sum, instalment, open market or conversion.
  5. 5Deal with premium, discount or loss on issue still unwritten. Write off any balance.
  6. 6After full redemption, transfer the DRR balance to General Reserve.
  7. 7Show the closing balances of debentures and reserve. Add a one-line legal comment citing section 71 where the question asks for provisions.

Quickest way: Four-line redemption check

When to use it: Use when time is short and the question gives a clear method and amount.

  1. Write the amount to be paid: face value plus any premium.
  2. Write the source: bank, or investment realised, or new issue.
  3. Write the reserve entry: transfer to DRR at the stated percentage.
  4. Write the closing entry: DRR to General Reserve after redemption.

Common mistakes in Redemption of Debentures: Methods and Provisions

  • Paying the premium at face value only

    You focus on the debentures and forget the premium due on redemption.

    Fix: Check the terms of issue. Bank is credited with face value plus premium.

  • Treating DRR as a charge against profit

    It looks like an expense because of the debit to Profit and Loss A/c.

    Fix: It is an appropriation of profit. It stays in reserves until redemption and then moves to General Reserve.

  • Forgetting that conversion needs a conversion option

    You treat conversion like any other method.

    Fix: State that section 71(1) permits conversion only where the terms provide the option, with a special resolution.

  • Using the wrong gain or loss in open market purchase

    You mix up cost and face value.

    Fix: Gain = Face value − Cost paid when cost is lower. Loss when cost is higher. Show it in the entry.

  • Stating a debenture can carry voting rights

    You confuse debentures with shares.

    Fix: Section 71(2) forbids debentures with voting rights.

  • Skipping the debenture trustee or Tribunal point in a theory answer

    You write only the accounting treatment.

    Fix: Add that the trustee protects holders (section 71(6)) and the Tribunal can order redemption on default (section 71(10)).

Worked examples

Example 1

X Ltd has 5,000, 9% debentures of ₹100 each (₹5,00,000) due for redemption at par. The company redeems them in a lump sum at maturity. DRR of ₹1,25,000 stands in the books. Pass the entries.

Show the solution
  1. Face value = 5,000 × ₹100 = ₹5,00,000.
  2. Redemption at par means the bank pays ₹5,00,000.
  3. Entry 1: 9% Debentures A/c Dr ₹5,00,000; To Debenture-holders A/c ₹5,00,000.
  4. Entry 2: Debenture-holders A/c Dr ₹5,00,000; To Bank A/c ₹5,00,000.
  5. Entry 3: Debenture Redemption Reserve A/c Dr ₹1,25,000; To General Reserve A/c ₹1,25,000.

Answer: Bank pays ₹5,00,000. The DRR of ₹1,25,000 moves to General Reserve after redemption.

Example 2

Y Ltd has 2,000 debentures of ₹100 each (₹2,00,000). On 31 March it purchases 500 debentures in the open market at ₹96 each and cancels them immediately. Pass the entries.

Show the solution
  1. Face value cancelled = 500 × ₹100 = ₹50,000.
  2. Cost paid = 500 × ₹96 = ₹48,000.
  3. Gain = ₹50,000 − ₹48,000 = ₹2,000.
  4. Entry 1: Own Debentures A/c Dr ₹48,000; To Bank A/c ₹48,000.
  5. Entry 2: Debentures A/c Dr ₹50,000; To Own Debentures A/c ₹48,000; To Capital Reserve A/c ₹2,000.

Answer: Bank pays ₹48,000. The company records a gain of ₹2,000 and removes 500 debentures. Balance outstanding: ₹1,50,000.

Exam tips

  • Theory questions often ask for the legal rules. Cite section 71 by sub-section: (1) conversion, (2) no voting rights, (4) DRR, (5) trustee, (8) pay as per terms, (10) Tribunal on default.
  • In a numerical, write the DRR entry separately. Marks are usually allotted to it.
  • State the method in your answer line. For example, 'redemption by draw of lots in instalments'.
  • If the question gives the DRR percentage or investment percentage, use it as given. Do not apply a rate from memory.
  • Close with a one-line conclusion on the closing debenture balance.

Practice questions from Accounting for 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 under section 71(4). The amount credited cannot be used except to redeem debentures.

Can a company issue debentures with voting rights?

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

Can debentures be converted into shares?

Yes, if the terms of issue give the option. Section 71(1) requires the issue to be approved by a special resolution passed at a general meeting.

What happens if a company fails to redeem debentures on time?

Under section 71(10), the Tribunal may, on application of any or all debenture-holders or the trustee, direct the company to redeem the debentures forthwith with principal and interest due.