 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.
 In law, a debenture is a document that either
creates a debt or acknowledges it. In corporate
finance, the term is used for a medium- to long-
term debt instrument used by large companies to
borrow money. In some countries the term is used
interchangeably with bond, loan, stock or note.

 Debentures are generally freely transferable by the

debenture holder. Debenture holders have no
rights to vote in the company's general meetings
of shareholders, 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's financial statements.
Debenture can be classified as under:
1. From security point of view:-
 Secured or Mortgage debentures : These are th
e  debentures that are secured by a charge
on the assets of the company.
 These are also called mortgage debentures.
 The holder’s  secured debentures have the right
 to recover their principal amount with unpaid
amount
of interest on such debentures out of the assets 
mortgaged by the company. In
India, debentures must be secured. 
i. Secured debentures can be of two types :
 (a)  First mortgage debentures : The holders of such debentu
res have a first claim on the assets charged.
 b) Second mortgage debentures :  The holders of 
such debentures have a second claim on the assets charged.
ii. Unsecured debentures: Debentures which do not carry any
security with regard to
the principal amount or unpaid interest are called unsecured
debentures. These are called simple debentures.
2) On the basis of redemption:
(i) Redeemable debentures : These are the debentures which are
issued for a fixed period.The principal amount of such debe
nture is paid off to the debenture holders on the
expiry of such period.
These can be redeemed by annual drawings or by purchasin
g from the open market
 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.
 On the basis of Records
 i) Registered debentures:  These are the debentures  that  a
re registered with the company.
  The amount of such debentures is
payable only to those debenture holders
whose name appears in the register of the company.
 ii)   
Bearer debentures : These are the debentures which are no
t
recorded  in  a  register of  the  company.  Such  debentures
  are transferrable merely by  delivery. Holder of
these debentures is entitled to get the interest
  On the basis of convertibility
 i)  Convertible debentures : These are the debentures t
hat can be converted into shares of
the company on the expiry of pre-decided
period.  The  term and conditions  of conversion  are
generally announced at the time of issue of debentures.
 Non-
convertible debentures : The debenture holders of suc
h debentures  cannot
convert their debentures into shares of the company
 On the basis of priority
 First debentures : These debentures are redeemed
before other debentures.
 Second debentures : These debentures are redeemed
after the redemption of first debentures
 By issuing debentures means issue of a certificate by the company und
er its seal which is an acknowledgment of debt taken by the company.
 The procedure of issue of debentures by a company is similar to that of
 the issue of shares. A
Prospectus is issued, applications are invited, and letters
of allotment are issued. On rejection of
applications, application money is
refunded. In case of partial allotment, excess application
money may be
Issue of Debenture takes various forms which are as under
adjusted towards subsequent calls.
 Debentures issued for cash
 Debentures issued for consideration other than cash
 Debentures issued as collateral security:
 Further, debentures may be issued
 i) at par (ii) at premium, and(iii) at discount
 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 L.F DEBIT CREDIT

BANK A/C 90,000

TO DEBENTURES APPLICATION A/C 90,000

DEBENTURE APPLICATION A/C 90,000

TO DEBENTURE A/C 60,000

TO DEBENTURE ALLOTMENT A/C 30,000

DEBENTURE ALLOTMENT A/C 35,000

DISCOUNT ON DEBENTURES A/C 5,000
TO DEBENTURES A/C 40,000

BANK A/C 5,000

TO DEBENTURE ALLOTMENT 5,000

 PARTICULARS L.F DEBIT CREDIT

PROFIT AND LOSS A/C 500

TO DISCOUNT ON ISSUE OF 500

DEBENTURES

PROFIT AND LOSS A/C 10,000

TO INTEREST ON DEBENTURES A/C 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
apply for 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 account’s 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.
The Central Government has prescribed the following rates 
of underwriting commission:

On Amounts in On amounts
P/S 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% 1.5%

For amount in excess of Rs.5

2% 1%
lakhs
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 because with this liability of underwriters
will decrease.

Then, you will deduct all marked application of

shareholders because with this liability of underwriters
will also decrease.

Then, you will deduct all the number of shares which

will be taken under firm underwriting contract.
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 L.F DEBIT CREDIT

BANK A/C …DR 4,70,000

TO DEBEBTURES A/C 4,70,000

X & CO. A/C … 30,000

DR
TO DEBENTURES A/C 30,000

COMMISSION ON ISSUE OF 20,000

DEBENTURES A/C .. DR
TO X & CO. A/C 20,000
 PARTICULARS L.F DEBIT CREDIT

BANK A/C ….DR 10,000

TO X & CO. 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 X Y Z TOTAL
40% 30% 30% 100%
SHARES SHARES SHARES SHARES

GROSS LIABILTY 40,000 30,000 30,000 1,00,000

LESS: MARKED 20,000 10,000 20,000 50,000
APPLICATIONS

20,000 20,000 10,000 50,000

LESS: MAEKED
APPLICATIONS 12,000 9,000 9,000 30,000
( IN THE RATIO OF
GROSS LIABILITIES ;
40:30:30 )
NET LIABILTY 8,000 11,000 1,000 20,000