Different Methods of Redemption Of Debentures

Though discharge of debenture liability is usually by paying cash to the debenture holders for which either of the two methods mentioned above be followed to meet the cash requirement at the time of redemption. However, following are the other methods by which the liability on debentures may be extinguished.

Conversion

The conversion of debentures means the debentures are converted into preference shares or equity shares. For the purpose of conversion debentures are to be classified as fully convertible debentures (FCDs), partly convertible debentures (PCDs), and non-convertible debentures (NCDs). A company cannot issue FCDs having a conversion period of more than 36 months, unless the conversion is made optional with a put and call option. If conversion takes place 18 months after the date of allotment but before 36^th months, any conversion in part or whole of the debenture is optional in the hands of the debenture holder. If he does not exercise the option it will effectively become an NCD. FCDs with conversion period less than 12th months are treated as quasi-equity and are treated at par with equity. FCDs are fully convertible into equity shares either at par or premium. The premium to be charged at conversion must be predetermined and announced in the prospectus. In the case of PCDs it comprises two parts, namely the convertible portion and the non-convertible portion.. It is only the convertible portion that would be converted into shares. In the case of NCDs the liability will be discharged by payment of cash or rollover. A company can also convert NCDs at a later date into equity shares but it should be at the option of debenture holder.

Rollover

Rollover means the issue of new debentures in the place of old ones. Rollover must be with the written consent of the debenture holder. If he does not given written consent, his claim must be settled in cash. Also whenever the debenture liability is rolled over company must obtain fresh credit rating. Fresh trust must be executed at the time of rollover. Also fresh security must be created in respect of rolled over debentures. Subject to the conditions listed rollover can be done without change in the’ interest rate if the non-convertible portion of PCDs/ NCDs of a listed company exceeds ` 50 lakhs.