Sources of Redemption of Debentures
There are no legal restrictions regarding the sources used by the company for the redemption of debentures. The different terms and conditions laid at the time of issue of debentures restrict the company's freedom about the sources to be used by it for the redemption of debentures. The main sources for the redemption of the debentures which the company may use are as follows:
- Redemption out of fresh capital: A company can issue the new shares or debentures and the amount received on their issue can be used for the redemption of the debentures. In this case a new liability is created to write off the old liability.
- Redemption by conversion: In this instead of issuing shares or debentures for cash and using their proceeds for the purpose of redemption, the company issues the new shares or debentures towards payment of sum due to existing debenture holders. It is the conversion into new shares or debentures.
- Redemption out of sale proceeds: A company can sell some of its fixed assets and use the sale proceeds of such assets for the redemption of debentures.
- Redemption out of existing capital: A company can redeem its debentures by using its funds without creating reserve for its purpose. This process result in the reduction of the value of the assets by the amount paid for the redemption of debentures. It adversely affects the working capital of the company.
- Redemption out of profits: A company uses a part of its existing profits for the purpose of redemption of debentures. When the redemption of debentures is made out of profits, the amount used for this purpose is appropriated out of P & L Appropriation A/c to Debentures Redemption Reserve A/c.
On the basis of the mentioned sources the following methods are available for the redemption of debentures:
Methods of Redemption of debentures:
The various methods for the redemption of debentures are listed out as follow:
- Redemption out of profits
- Redemption out of capital
- Redemption by conversion
- Redemption of debentures by purchasing own debentures in the open market.