Issue of Debentures (at Par, Premium, and Discount)

Debentures are one of the most important sources of long-term finance for companies. When a company needs funds but does not want to dilute ownership by issuing shares, it raises money through debentures. The issue of debentures involves various accounting treatments depending upon whether they are issued at par, at premium, or at discount. Understanding these concepts is essential for corporate accounting.

Meaning of Debentures

A debenture is a written acknowledgement of debt issued by a company under its common seal, containing an undertaking to repay a specified sum of money at a fixed date along with interest at a predetermined rate.

Definitions of Debentures

• According to Section 2(30) of the Companies Act, 2013,

A debenture includes debenture stock, bonds, or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

Debenture holders are creditors, not owners of the company.

Meaning of Issue of Debentures

The issue of debentures refers to the process by which a company borrows funds from the public or institutions by issuing debenture certificates. Debentures may be issued:

• At par

• At premium

• At discount

The method of issue affects accounting entries, liability presentation, and disclosure in financial statements.

1. Issue of Debentures at Par

Issue of debentures at par means issuing debentures at a price equal to their face value. There is no additional amount charged or allowed as concession.

For example, if a debenture of face value ₹1,000 is issued at ₹1,000, it is said to be issued at par.

Features of Issue of Debentures at Par

• Issue price equals nominal value

• No premium or discount involved

• Simple accounting treatment

• Commonly used by new or average-performing companies

Accounting Treatment of Issue of Debentures at Par

When debentures are issued at par:

• The amount received is debited to Bank Account

• The face value is credited to Debentures Account

If issued in instalments, accounting entries are passed for application, allotment, and calls.

Advantages of Issue of Debentures at Par

• Easy to understand and account for

• Attractive to investors seeking safety

• No capital loss or capital gain

• Suitable for companies with stable creditworthiness

2. Issue of Debentures at Premium

Issue of debentures at premium means issuing debentures at a price higher than their face value. The excess amount over face value is known as premium on issue of debentures.

For example, issuing a ₹1,000 debenture at ₹1,050 means a premium of ₹50.

Features of Issue of Debentures at Premium

• Issue price exceeds face value

• Indicates strong financial position

• Premium is a capital receipt

• Common for reputed companies

Accounting Treatment of Issue of Debentures at Premium

When debentures are issued at premium:

• Bank Account is debited with total amount received

• Debentures Account is credited with face value

• Securities Premium Account or Premium on Issue of Debentures Account is credited with premium amount

Premium received on issue of debentures is treated as a capital profit.

Utilisation of Premium on Issue of Debentures

Premium on issue of debentures can be used for:

• Writing off discount on issue of debentures

• Writing off preliminary expenses

• Providing premium payable on redemption of debentures

• Strengthening financial position

Advantages of Issue of Debentures at Premium

• Improves capital reserves

• Reflects market confidence

• Reduces effective cost of borrowing

• Helps meet future financial obligations

3. Issue of Debentures at Discount

Issue of debentures at discount means issuing debentures at a price lower than their face value. The difference between face value and issue price is called discount on issue of debentures.

For example, issuing a ₹1,000 debenture at ₹950 involves a discount of ₹50.

Features of Issue of Debentures at Discount

• Issue price is lower than nominal value

• Discount represents capital loss

• Common when market conditions are unfavorable

• Used to attract investors

Accounting Treatment of Issue of Debentures at Discount

Discount on issue of debentures is treated as a capital loss. The accounting treatment is:

• Bank Account is debited with amount received

• Discount on Issue of Debentures Account is debited with discount amount

• Debentures Account is credited with face value

The discount is shown on the asset side of the Balance Sheet and written off over the life of the debentures.

Writing Off Discount on Issue of Debentures

Discount on issue of debentures is written off:

• In equal instalments over the life of debentures, or

• In proportion to outstanding debentures

This ensures proper matching of cost with benefit.

Disadvantages of Issue of Debentures at Discount

• Reduces overall profitability

• Represents capital loss

• Weakens financial position

• Increases effective interest cost

Difference between Issue of Debentures at Par, Premium, and Discount

• At Par: Issue price equals face value

• At Premium: Issue price is higher than face value

• At Discount: Issue price is lower than face value