ISSUE OF DEBENTURES

REDEMPTION OF DEBENTURES
UNDERWRTING

Meaning :Debenture is an instrument in writing for a

fixed period given by a company
acknowledging the liability for total amount
received as a result of issue of debenture and
agreeing thereby to pay the money raised
after the expiry of stipulated period at a
certain rate of interest.
Need for issue of debentures :A company for its extension & development
may require to raise funds without increasing
its share capital so, a may invite the public by
open declaration to lend money for a fixed
period at a declared rate to be paid on such
money.

Inlaw, adebentureis a document that either

creates a debt or acknowledges it. Incorporate
finance, the term is used for a medium- to longterm debtinstrumentused by large companies
to borrow money. In some countries the term is
used interchangeably withbond,loan,
stockor note.

Debentures are generally

freelytransferableby the debenture holder.
Debenture holders have no rights to vote in
the company's general meetings
ofshareholders, but they may have separate
meetings or votes e.g. on changes to the rights
attached to the debentures. The interest paid
to them is a charge against profit in the
company'sfinancial statements.

Debenturecanbeclassifiedasunder:
1.

Fromsecuritypointofview:SecuredorMortgagedebentures:Thesea
rethe debenturesthat
aresecuredbyacharge
ontheassetsofthecompany.
Thesearealsocalledmortgagedebentures.
Theholders
secureddebentureshavetheright
torecovertheirprincipalamountwithunpaid
amount
ofinterestonsuchdebenturesoutoftheasset
smortgaged bythecompany.In
India,debenturesmustbesecured.

Secured debenturescanbeoftwotypes:

(a)Firstmortgagedebentures:Theholdersofsuchde
bentures haveafirstclaimon theassetscharged.

b)Secondmortgagedebentures: Theholdersof
suchdebentureshaveasecondclaim onthe
assetscharged.
ii.
Unsecureddebentures:Debentureswhichdonotcarrya
ny securitywithregardto
theprincipalamountorunpaidinterestare called
unsecured debentures. These are called simple
debentures.
2)
Onthebasisofredemption:
(i)Redeemabledebentures:Thesearethedebentures
whichare
issuedforafixedperiod.Theprincipalamountofsuchdebe
nture ispaidofftothedebentureholdersonthe
expiryofsuchperiod.
Thesecanberedeemedbyannualdrawingsorbypurchasi
ng from theopenmarket
i.

ii) Non-redeemable debentures : These are the

debentures which are not redeemed in the life time
of the company. Such debentures are paid back only
when the company goes into liquidation.
OnthebasisofRecords
i)Registereddebentures:Thesearethedebentur
esthatare registeredwiththe company.
Theamountofsuchdebenturesis
payableonlytothosedebentureholders
whosenameappearsin theregisterofthecompany.
ii)
Bearerdebentures:Thesearethedebentureswhi
charenot
recordedinaregisterofthecompany.Suchdebe
nturesare
transferrablemerelybydelivery.Holderof
thesedebenturesis entitledtogettheinterest

Onthebasisofconvertibility

i)Convertibledebentures:Thesearethedebent
uresthatcanbe convertedintosharesof
thecompanyontheexpiryofpre-decided
period.Thetermandconditionsofconversionare
generally
announcedatthetimeofissueofdebentures.
Nonconvertibledebentures:Thedebentureholderso
fsuch debenturescannot
converttheirdebenturesintosharesofthecompany
Onthebasisofpriority
First debentures : These debentures are
redeemed before other debentures.
Second debentures : These debentures are
redeemed after the redemption of first debentures

Byissuingdebenturesmeansissueofacertificatebythecom
panyunder itssealwhichisan
acknowledgmentofdebttakenbythecompany.
Theprocedureofissueofdebenturesbyacompanyissimilar
tothatofthe issueofshares.A
Prospectusisissued,applicationsareinvited,andletters
ofallotmentareissued.Onrejectionof
applications,applicationmoneyis
refunded.Incaseofpartialallotment, excessapplication
moneymaybe
IssueofDebenturetakesvariousformswhichareasunder
adjustedtowardssubsequent calls.
Debenturesissuedforcash
Debenturesissuedforconsiderationotherthancash
Debenturesissuedas collateralsecurity:
Further,debenturesmaybeissued
i)atpar (ii)atpremium,and(iii)atdiscount

OVER SUBSCRIPTION

Company if receives applications for number

of debentures that exceed the number of
debentures offered for subscription, it is
called over subscription. There can be
following treatment of the excess
application money received :
(a) The total amount of excess number of
applications is refunded in case the
applications are totally rejected.
(b) The amount of excess application money
is totally adjusted towards amount due on
allotment and calls
--- in case partial allotment is made,
--- the excess amount is adjusted towards
sums due on allotment and rest of the
amount is refunded.

ISSUE OF DEBENTURES AT PREMIUM AND AT

DISCOUNT
Debentures are said to be issued at premium when these are
issued at a value which is more than their nominal value. For
example, a debenture of Rs 100 is issued at Rs 110. This excess
amount o f Rs 10 is the amount of premium. The premium on the
issue of debentures is credited to the Securities Premium A/c as
per section 78 of the Companies Act, 1956.

ISSUE OF DEBENTURES AT DISCOUNT

When debentures are issued at less than their nominal value they
are said to be issued at discount . For example, debenture of Rs
100 each is issued at Rs 90 per debenture. Companies Act,1956
has not laid down any conditions for the issue of debentures at a
discount as have been laid down in case of issue of shares at
discount. However, there should be provision for issue of such
debentures in the Articles of Association of the Company.

ISSUE OF DEBENTURES FOR

CONSIDERATION OTHER THAN CASH
When a company purchases some assets and
issues debentures as a payment for the
purchase, to the vendors it is known as issue
of debentures for consideration other than
cash. Debentures can be issued to vendors at
par, at premium and at discount

ISSUE OF DEBENTURES AS COLLATERAL

SECURITY

Collateral security means security given in addition to

the principal security. It is a subsidiary or secondary
security. Whenever a company takes loan from bank
or any financial institution it may issue its
debentures as secondary security which is in addition
to the principal security. Such an issue of debentures is
known as issue of debentures as collateral security.
The lender will have a right over such debentures only
when company fails to pay the loan amount and the
principal security is exhausted. In case the need to
exercise this right does not arise debentures will be
returned back to the company. No interest is paid on
the debentures issued as collateral security because
company pays interest on loan.

In the accounting books of the company issue of

debentures as collateral security can be credited
in two ways.
(i) No journal entry to be made in the books of
accounts of the company :
Debentures are issued as collateral security. A
note of this fact is given on the liability side of
the balance sheet under the heading Secured
Loans and Advances.
(ii) Entry to be made in the books of account the
company
A journal entry is made on the issue of
debentures as a collateral security, Debentures
suspense A/c is debited because no cash is
received for such issue.

A Issue of Debenture at Par

When company receives application money of debentures

1st journal Entry

Bank account Debit
Debenture Application Account Credit

2nd Journal Entry

When company accepts the applications
Debenture Application Account Debit
Debenture Account Credit

3rd Journal Entry

When Allotment money of debenture due
Debenture Allotment Account Debit
Debenture Account Credit

4th Journal Entry

When Allotment money of debenture received
Bank Account Debit
Debenture Allotment Account Credit

5th Journal Entry

When Call money of debenture is payable
Debenture Calls Account Debit
Debenture Account Credit

6th Journal Entry

When Call money of debenture is received
Bank Account Debit
Debenture Calls Account Credit

B- When Company issue of debenture at

premium
If premium is receivable with application
money
1st Journal Entry
When amount of application received
with premium
Bank Account Debit
Debenture Application account Credit

2nd Journal Entry

Debenture Application Account Debit
Debenture Account Credit
Security premium Account credit
If premium receivable on allotment then
Debenture Allotment account debit
Debenture Account Credit
Security Premium Account Credit
And allotment money received with premium
Bank account Debit
Debenture Allotment Account Credit
When Debenture Issued At discount
Debenture Allotment Account Debit
Discount on Issue of Debenture Account Debit
Debenture Allotment Account Credit
When discounted amount of debenture is received
Bank Account Debit
Debenture Allotment Account Credit

Illustration :

On July 1,2007 sports Ltd., issued 10,000, 12 percent

debentures of Rs.10 each at 95 per cent, repayable
on June 30,2013 at par. Rs.6 per debenture was
payable on application and the balance on
allotment. Interest was payable on full nominal
amount as from september1, 2007.

Applications were received for 15000 debentures. All

allotments were made proportionately , over
subscriptions being applied to the balance due on
allotment, which took place on August 31,2007. All
sums due on allotment were received by September
14,2007.Assuming that the discount is to be written
off evenly over the whole period, you are required to
draft journal entries to record : (a) the issue of
debentures , and (b) the charges to profit and loss
account for the year ended June 30,2008.

PARTICULARS
BANK A/C

L.F

DEBIT
90,000

TO DEBENTURES APPLICATION A/C

DEBENTURE APPLICATION A/C

90,000

90,000

TO DEBENTURE A/C
TO DEBENTURE ALLOTMENT A/C

DEBENTURE ALLOTMENT A/C

DISCOUNT ON DEBENTURES A/C

60,000
30,000

35,000
5,000

TO DEBENTURES A/C

BANK A/C
TO DEBENTURE ALLOTMENT

CREDIT

40,000

5,000
5,000

PARTICULARS

PROFIT AND LOSS A/C

L.
F

DEBIT

500

TO DISCOUNT ON ISSUE OF
DEBENTURES

PROFIT AND LOSS A/C

TO INTEREST ON DEBENTURES A/C

CREDIT

500

10,000
10,000

Underwriting is an agreement, entered into by a

company with a financial agency, in order to ensure
that the public will subscribe for the entire issue of
shares or debentures made by the company. The
financial agency is known as the underwriter and it
agrees to buy that part of the company issues
which are not subscribed to by the public in
consideration of a specified underwriting
commission.

The underwriting agreement, among others, must

provide for the period during which the agreement is in
force, the amount of underwriting obligations, the period
within which the underwriter has to subscribe to the
issue after being intimated by the issuer, the amount of
commission and details of arrangements, if any, made by
the underwriter for fulfilling the underwriting obligations.
The underwriting commission may not exceed 5 percent
on shares and 2.5 percent in case of debentures.
Underwriters get their commission irrespective of
whether they have to buy a single security or not.

Underwriting has become very important in recent years with

the growth of the corporate sector. It provides several
benefits to a company:It relieves the company of the risk and uncertainty of
marketing the securities.
Underwriters have an intimate and specialised knowledge
of the capital market. They offer valuable advice to the
issuing company in the preparation of the prospectus, time of
floatation and the price of securities, etc. They also provide
publicity service to the companies which have entered into
underwriting agreements with them.

It helps in financing of new enterprises and in the

expansion of the existing projects.
It builds up investors' confidence in the issue of
securities. The association of well-known underwriters
lends prestige to the company and the investors feel
that the issue is sound enough for profitable
investment. Also, the securities underwritten by reputed
underwriters receive better response from the public.
The issuing company is assured of the availability of
funds. Important projects are not delayed for want of
funds.
It facilitates the geographical dispersal of securities
because generally, the underwriters maintain contacts
with investors throughout the country.

COMPLETE UNDERWRITING: If the whole issue

of debentures of a company is underwritten, it is
called complete underwriting. In such a case the
whole issue is underwritten either by an individual/
institution agreeing to take the entire risk or by a
number of firms or institutions each agreeing to
take the risk to a limited extent.
PARTIAL UNDERWRITING: If part of issue of
debentures of a company is underwritten, it is said
to be partial underwriting. In such a case the part
of the issue is underwritten either by an individual/
institution or by a number of firms or institutions
each agreeing to take risk to a limited extent.

Syndicate Underwriting:- is one in which, two or

more agencies or underwriters jointly underwrite an
issue of securities. Such an arrangement is entered
into when the total issue is beyond the resources of
one underwriter or when he does not want to block up
large amount of funds in one issue.
Sub-Underwriting:- is one in which an underwriter
gets a part of the issue further underwritten by another
agency. This is done to diffuse the risk involved in
underwriting. The name of every under-writer is
mentioned in the prospectus along with the amount of
securities underwritten by him.

Firm Underwriting:- is one in which the underwriters

applyfor a block of securities. Under it, the underwriters
agree to take up and pay for this block of securities as
ordinary subscribers in addition to their commitment as
underwriters. The underwriter need not take up the
whole of the securities underwritten by him. For
example, if the underwriter has underwritten the entire
issue of 5 lakh shares offered by a company and has in
addition applied for 1 lakh shares for firm allotment. If
the public subscribes to the entire issue, the underwriter
would be allotted 1 lakh shares even though he is not
required to take up any of the shares.

Underwriting of capital issues has become very popular

due to the development of the capital market and special
financial institutions. The lead taken by public financial
institutions has encouraged banks, insurance companies
and stock brokers to underwrite on a regular basis. The
various types of underwriters differ in their approach and
attitude towards underwriting:Development banks like IFCI, ICICI and IDBI:- they
follow an entirely objective approach. They stress upon
the long-term viability of the enterprise rather than
immediate profitability of the capital issue. They attempt
to encourage public response to new issues of securities.

Institutional investors like LIC and AXIS:- their

underwriting policy is governed by their
investment policy.
Financial and development corporations:- they
also follow an objective policy while underwriting
capital issues.
Investment and insurance companies and
stock-brokers:- they put primary emphasis on the
short term prospects of the issuing company as
they cannot afford to block large amount of money
for long periods of time.

To act as an underwriter, a certificate of registration

must be obtained from Securities and Exchange Board
of India (SEBI) . The certificate is granted by SEBI
under the Securities and Exchanges Board of India
(Underwriters) Regulations, 1993. These regulations
deal primarily with issues such as registration, capital
adequacy, obligation and responsibilities of the
underwriters. Under it, an underwriter is required to
enter into a valid agreement with the issuer entity and
the said agreement among other things should define
the allocation of duties and responsibilities between
him and the issuer entity. These regulations have ben
further amended by the Securities and Exchange
Board of India (Underwriters) (Amendment)
Regulations, 2006.

Marked application is the term which is used in

underwriting of debentures. Marked application means all
those application which is received by company and a
mark will show on each application which identify a
specific underwriter's sale. Suppose, A has sell XYZ's
company's 20000 share applications. Now, when
company gets 20,000 share applications, it application
will show A's identity. So, A underwriter's liability will
deduct with 20000 shares. ( It is assumed that each
shareholder send one application for buying one share).

If company has also contracted with B underwriter and

he underwrote 10,000 shares and company receives
the application of 5000 shares in which mark shows the
identity that it was sold by B. So, B underwriter's liability
will decrease with 5000 shares.

So, mark on application or marked application is

very important for calculating the net liability of
underwriter.

In underwriting of debentures Unmarked application is

totally opposite of marked application. In these
applications, there is no any sign which shows the identity
of any specific underwriter who has sold it. So, all these
application's no. of shares are totalled by company and for
reducing the liability of each underwriter, these total
unmarked application shares are distributed among all the
underwriters in their gross liability ratio and then deduct
from gross liability of each underwriter. You can study the
statement preparation for calculating the net liability of
underwriter.

In the books of company, you will pass following journal

entries.
1. When company gets money from public for selling
shares under the contract of underwriting.
Bank account Dr. XXXX
Share capital Account Cr. XXXX
2. When underwriter takes the liability of unsold
shares
Underwriter's account Dr. XXXX
Share Capital Account Cr. XXXX

3. When underwriting commission will due

Underwriting Commission Account Dr. XXXX
Underwriter's Account Cr. XXXX
4. When Underwriter deduct his commission
and send net amount of takeover shares
Bank Account Dr. XXXX
Underwriter Account ( Total receivable amount on
takeover shares by underwriter - Underwriter's
commission) Cr. XXXX

Underwriting account is important account which is

made by underwriter for calculating the net profit or loss
from underwriting business. In this accounts debit side,
he shows all his expenses relating to underwriting and
in the credit side of this account, he shows his
underwriting and sub underwriting commission and any
other profit from underwriting business. Net difference
between debit and credit of underwriting account will be
his profit or loss which will be shown as balancing
figure.

Underwriting commission is payment which is

given by company to underwriters for their
services of underwriting. Actually, contract of
underwriting is same as the contract of insurance.
Company gives maximum 5% commission to
underwriter for selling his shares. Underwriter will
take the risk of takeover the shares which will not
be subscribed by public.

The underwriting commission is paid only in

accordance with the Section 76 of the
Companies Act, 1956. The statutory regulations
and other obligations regarding the
commission are:
-The underwriting commission should be paid only
with the acceptance of the article of association of
the company
The underwriting commission should be paid in
accordance with the rules and regulations as
prescribed by the Government.

In case of shares, the amount or rate of commission

which is not offered to the public should be disclosed
in the statement in lieu of prospectus.
The number of underwriters and their proposition
should be indicated in the statement.
An underwriting agreement copy should be submitted
to the Registrar of Companies at the time of delivery of
the prospectus.

TheCentralGovernmenthasprescribedthefollowingrates
ofunderwritingcommission:
P/S

On Amounts in
On amounts
developing on the subscribed by
underwriter
the Public

(a) Equality shares

2.5%

2.5%

b) Preference
shares/convertible and
non-convertible
debentures

For amounts upto Rs. 5

lakhs

2.5%

For amount in excess of

Rs.5 lakhs

2%

1.5%
1%

For calculating underwriter's net liability, you have to

understand marked application, unmarked application
and firm underwriting.

STEPS:

First of all we deduct all unmarked application of

shareholders becausewith this liability of
underwriters will decrease.
Then, you will deduct all marked application of
shareholders becausewith this liability of
underwriters will also decrease.
Then, you will deduct all the number of shares
which will be taken underfirm underwriting

Now balance amount will show the number of

shares which will be taken under the contract. If
there is any negative number, then these will be
adjusted with other underwriters in gross liability
ratio.
After this adjustment, balance number will show
as net liability of underwriters.

A company issues 50,000 shares of Rs.10 each at

par. The whole issue has been underwritten by X &
Co. for a commission of 4%. The company
received applications only for 47,000 shares. All
the applications were accepted. Give the journal
entries to record the above transactions.

PARTICULARS
BANK A/C

L.F
DR

DEBIT
4,70,00
0

TO DEBEBTURES A/C

X & CO. A/C

DR

4,70,00
0

30,000

TO DEBENTURES A/C

COMMISSION ON ISSUE OF
DEBENTURES A/C
TO X & CO. A/C

CREDIT

30,000

20,000
.. DR
20,000

PARTICULARS
BANK A/C
TO X & CO.

L.
F
.DR

DEBIT

CREDIT

10,000
10,000

A ltd. Issued 1,00,000 equity shares. The whole of

the issue was underwritten as follows;
X 40%; Y 30%; Z 30%
Applications for 80,000 shares were received in all,
out of which applications for 20,000 shares had the
stamp of X, those for 10,000 shares that of Y, and
20,000 shares that of Z. the remaining applications
for 30,000 shares did not bear any stamp.
Show the liability of the underwriter

PARTICULARS

GROSS LIABILTY
LESS: MARKED
APPLICATIONS

LESS: MAEKED
APPLICATIONS
( IN THE RATIO OF
GROSS LIABILITIES ;
40:30:30 )
NET LIABILTY

X
40%
SHARES

Y
30%
SHARES

Z
30%

TOTAL
100%

SHARES

SHARES

40,000 30,000
20,000 10,000

30,000 1,00,00
20,000 0
50,000

20,000 20,000

10,000 50,000

12,000 9,000

9,000

30,000

8,000

1,000

20,000

11,000