Issue of Debentures Detailed Notes for UGC-NET Commerce Exams

Issuing debentures is a common method used by companies to raise long-term capital from investors. Debentures are debt instruments that companies issue to investors in exchange for funds. Investors who purchase debentures become creditors of the company and are entitled to receive periodic interest payments and repayment of the principal amount at maturity. Debentures are typically unsecured, meaning they are not backed by specific collateral, although some may be secured by company assets. The issuance of debentures provides companies with an alternative to equity financing and allows them to diversify their sources of capital.

Issue of debentures is a very vital topic to be studied for the commerce related exams such as the UGC-NET Commerce Examinations.

In this article, the learners will be able to know about the issue of debentures as a collateral security along with certain other related topics in detail.

Discount on Issue of Debenture

Discount on issue of debenture is a financial account used to record the difference between the face value or nominal value of debentures issued and the amount received from investors when the debentures are sold at a price below their nominal value.

In the context of accounting, a discount on issue of debenture is considered a capital loss for the issuing company because it results in the company receiving less cash than the face value of the debentures. This discount represents the cost to the company of issuing debentures at below their nominal value.

The discount on issue of debenture is recorded as an expense on the company's income statement and is deducted from the proceeds received from the issuance of debentures. It reduces the amount of funds available to the company for its operations or investments.

From an investor's perspective, purchasing debentures at a discount allows them to acquire the debentures at a lower price than their face value, resulting in a higher effective yield on their investment. However, for the issuing company, issuing debentures at a discount may indicate financial distress or may be a strategic decision to attract investors by offering them a lower purchase price.

Issue and Redemption of Debentures

The issuance and redemption of debentures are important transactions in corporate finance, representing the issuance of debt securities by a company and their subsequent repayment. Here's an overview of both processes:

Issuance of Debentures

• Decision and Planning: 
  • The company's management decides to raise funds through the issuance of debentures after considering various financing options and assessing the company's capital needs.
• Terms and Conditions: 
  • The terms of the debentures are determined, including the total amount to be raised, the interest rate (coupon rate), the maturity date, any conversion or redemption features, and the security, if any.
• Offering and Subscription:
  • The company offers the debentures to investors through a prospectus or private placement memorandum.
  • Investors subscribe to the debentures by submitting applications and funds as per the terms of the offering.
• Allotment and Issuance:
  • After the subscription period closes, the company allots the debentures to the subscribing investors based on the terms of the offering.
  • The company issues the debenture certificates to the investors, evidencing their ownership of the debt securities.
• Recording Journal Entries:
  • The company records journal entries to reflect the issuance of debentures, typically debiting the cash or bank account for the funds received and crediting the debenture liability account.

Redemption of Debentures

• Maturity Date:
  • Upon reaching the maturity date specified in the debenture agreement, the company is obligated to repay the principal amount to the debenture holders.
• Prepayment or Call Option:
  • In some cases, the company may have the option to redeem the debentures before the maturity date, either through a prepayment provision or a call option.
• Notice to Debenture Holders:
  • The company provides notice to debenture holders regarding the redemption, including the redemption date, redemption price, and instructions for surrendering the debentures.
• Repayment of Principal:
  • On the redemption date, the company repays the principal amount to the debenture holders, typically through cash payment or transfer to their bank accounts.
• Recording Journal Entries:
  • The company records journal entries to reflect the redemption of debentures, typically debiting the debenture liability account and crediting the cash or bank account for the amount repaid.

Conclusion

In conclusion, the issuance of debentures is an important aspect of corporate finance, allowing companies to raise funds for long-term investment and growth. By issuing debentures, companies can access capital from a diverse range of investors, including institutional investors, retail investors, and financial institutions. Debentures provide investors with a fixed income stream in the form of interest payments and offer companies flexibility in managing their capital structure. However, companies must carefully consider factors such as interest rates, maturity terms, and repayment obligations when issuing debentures to ensure they align with the company's financial objectives and risk tolerance.

Issue of debentures is a vital topic as per several competitive exams. It would help if you learned other similar topics with the Testbook App.