Methods of Redemption of Debentures
Various companies may opt for different methods of redemption of debentures. These following are some popular ways of doing so:
(i) Lump-sum payment on a prefixed date: This one-time method is considered to be among the simplest redeeming options. As per this method, debenture holders receive the promised sum on the prefixed date.
If the debentures are not redeemed at discount or premium, the lump sum amount, calculated by the summation of the principal value of all debentures, is paid out on the prefixed or maturity date that is mentioned on debenture agreement. The issuing company may decide to pay off the debenture amount before its maturity. Since companies know in advance, when they have to pay off for debenture, they are better positioned to streamline it.
(ii) Redemption by Annual Drawings (Sinking Fund Method): This is also known as the sinking fund. Essentially, it is a reserve that is built by accumulating at least 25% of the face value of debenture every year until its maturity. The main objective of this reserve is to protect the interest of debenture holders.
(iii) Purchase in the Open Market: Helps in reducing interest obligations and financial liabilities. Redeeming debentures by purchasing them in the open market involves a company buying its own debentures from the stock market, potentially at a discount, and then cancelling them to reduce outstanding debt and save on interest payments.
(iv) Conversion into Shares or New Debentures: Redemption of debentures by conversion means debenture holders can exchange their debentures for shares or new debentures instead of receiving cash, a method often used with convertible debentures.
(v) Payment in Installments: Redeeming debentures in installments, a method similar to repaying a loan, involves a company paying off debenture holders in portions over time, rather than a lump sum at maturity.
