Terms of Redemption: at Par, at Premium, or at Discount

Debentures are a type of long-term debt instrument used by companies to raise funds from the public or institutional investors. They are essentially a written acknowledgement of debt, under which the company promises to repay the principal along with a fixed rate of interest after a specified period. Debenture holders are creditors of the company and do not have ownership rights. Debentures can be secured or unsecured and may be convertible or non-convertible depending on the terms of issue.

These instruments offer a relatively safe investment option as they often come with fixed returns, especially when backed by company assets (secured debentures). From a company’s perspective, debentures are an effective tool for raising capital without diluting ownership. However, companies must ensure timely interest payments and redemption, as failure to do so can lead to legal action or reputational loss.

The application money is refunded in case the application is rejected and in case of partial allotment, the excess amount of application money will be used in further calls.

• At Par: At Par refers to the issuance or trading of a financial instrument—such as shares or debentures—at its face value or nominal value. For example, if a share has a face value of ₹100 and it is issued at ₹100, it is said to be issued at par. In this case, there is no premium or discount involved. This term is commonly used in accounting and finance to indicate that the security’s issue price is equal to its stated value. Issuing at par is often done to attract investors, especially when a company is newly formed or rebuilding trust.
• At Premium: At Premium refers to the issuance of shares or debentures at a price higher than their face (nominal) value. For instance, if a share with a face value of ₹100 is issued at ₹120, it is said to be issued at a premium of ₹20. The extra amount received over the face value is credited to the Securities Premium Account, which is a part of the company’s reserves. This amount cannot be used freely like other reserves and is governed by specific provisions under the Companies Act. Issuing at premium often reflects the company’s good reputation, performance, or strong investor demand.
• At Discount: At Discount refers to the issuance of shares or debentures at a price lower than their face (nominal) value. For example, if a share with a face value of ₹100 is issued at ₹90, it is said to be issued at a discount of ₹10. This means the company receives less than the nominal value of the security. Issuing securities at a discount is generally discouraged, especially in the case of equity shares, and is subject to strict legal restrictions under the Companies Act. However, it may be allowed in certain cases like sweat equity or for debentures to attract investors.

Accounting Treatment for Terms of Issue

Let us now see the journal entries for the six different scenarios of the terms of issue. These are the entries passed for the issue of the shares in these different cases.

1) Issued at Par & Redeemable at Par

2) Issued at Discount & Redeemable at Par

3) Issued at Premium & Redeemable at Par

4) Issue at Par & Redeemable at Premium

5) Issued at Discount & Redeemable at Premium

6) Issued at Premium & Redeemable at Premium