The Companies Act, 2013 provides various provisions for companies issuing debentures to raise funds for their business activities. A debenture is a type of loan instrument, and the Act provides for their issuance at par, premium, and discount. However, this answer will focus on the provisions for debentures issued at a discount.
Section 71 of the Companies Act, 2013 specifies that a company may issue debentures at a discount as long as it is authorized by the articles of association and a special resolution is passed by the company in a general meeting. The resolution must include details such as the maximum amount of discount at which the debentures are to be issued, the terms and conditions of the issue, and the date of redemption.
The Act also states that the discount on the issue of debentures cannot exceed 10% of the nominal value of the debentures. Additionally, the company must create a debenture redemption reserve account and credit at least 50% of the amount of the debentures issued at a discount to this account. This reserve account can only be used for the redemption of debentures.
A debenture issued at a discount is essentially a loan that is issued for less than the face value of the debenture. For example, a company might issue a debenture with a face value of Rs. 1000 but issue it at a discount of 10%, which means that it is issued at Rs. 900. The company would receive Rs. 900 in cash, but the debenture would still be redeemable at the face value of Rs. 1000 at maturity.
The purpose of issuing debentures at a discount is to make them more attractive to investors. By offering a discount, companies can lower the effective interest rate on the debenture, which can make it more attractive to investors. This can help the company to raise funds at a lower cost of capital.
When a company issues debentures at a discount, it must record the discount as an expense in its financial statements. This expense is recognized over the life of the debenture, and it is amortized to the income statement each year. For example, if a company issues a Rs. 1000 debenture at a 10% discount, it would record an expense of Rs. 100 in the first year, which is 10% of the discount. This expense would be recognized each year until the debenture matures.
Moving on to the accounting treatment of debentures issued as collateral security by a company, this refers to the issuance of debentures to secure a loan taken by the company. The debentures are issued to the lender as security for the loan and are held until the loan is repaid.
When a company issues debentures as collateral security, the debentures are recorded as a liability in the balance sheet at their face value. The interest payable on the debentures is also recorded as a liability in the balance sheet.
When the loan is repaid, the debentures are returned to the company. At this point, the liability is removed from the balance sheet. On the other hand, if the company defaults on the loan, the lender can sell the debentures in the open market to recover the loan amount. If the debentures are sold at a price lower than their face value, the company will have to bear the loss.
To summarize, the Companies Act, 2013 allows companies to issue debentures at a discount subject to specific conditions. These include creating a debenture redemption reserve account to ensure timely redemption and specifying the maximum amount of discount at which the debentures can be issued. When a company issues debentures as collateral security, the debentures are recorded as a liability in the balance sheet at their face value, and the interest payable on the debentures is also recorded as a liability in the balance sheet.