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CS Executive · Corporate Accounting and Financial Management · Accounting for Debentures

A company issues convertible debentures carrying an option to convert them into equity shares. Under the Companies Act, 2013 as given, what must have happened before the debentures were issued so that the rights-issue procedure for further shares does not apply to the conversion?

The terms of issue containing the conversion option must have been approved, before the debentures were issued, by a special resolution passed by the company in general meeting. Only then does the rights-offer requirement not apply to the shares allotted on conversion.

  1. AThe terms of issue containing the conversion option were approved by a special resolution passed in general meetingCorrect
  2. BThe terms of issue were approved by an ordinary resolution of the Board
  3. CThe conversion terms were approved by the Tribunal
  4. DThe debenture trustee gave a written consent to the conversion

Explanation

The provision on further issue of share capital does not apply to an increase in subscribed capital caused by exercising an option attached to debentures, provided the terms containing the option were approved before issue by a special resolution passed in general meeting. A Board resolution, Tribunal approval or trustee consent is not the stated condition.

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