Chapter 7

Understanding Minimum Subscription, Issue of Debentures and Accounting Treatment:

• Concept of Minimum Subscription with respect to Debentures under section 39(1) of the Companies Act, 2013:

According to section 39(1) of the Companies Act, 2013, a company cannot allot securities unless minimum subscription stated in the prospectus is received. Such minimum subscription is therefore, to be decided by the company. As per SEBI, 75% of the issue should be subscribed before a company allots debentures.

• Issue of Debentures: As per the Companies Act, 2013, a company may issue debentures:

1. For Cash: It means that the company has received an amount (in cash or cheque) against the debentures issued. When debentures are issued at cash, they may be issued at par, premium or at discount.
2. For Consideration other than Cash: It means that the company has not received amount (in cash or cheque) against the debentures issued. Such issue of debentures can be issue to promoters for their services, to vendors against assets purchased, etc.
3. For as Collateral Security: Security given for loans in addition to the prime or principal security is known as collateral security. Debentures may be issued as collateral security when the borrower is not in a position to give any other asset as a collateral security.

• Issue of Debentures for Cash: Such issue can be at par, at premium or at discount as follows:

1. At par: Debentures are issued at their nominal (face) value.
2. At premium: Debentures are issued at a price that is higher than its nominal (face) value. Such premium on issue is a capital receipt and is credited to Securities Premium Reserve Account. Utilisation of balance in such Securities Premium Account is governed by Section 52(2) of the Companies Act, 2013.
3. At discount: Here, debentures are issued at a price that is less than its nominal (face) value. Such amount of discount is debited to an account titled Discount on Issue of Debentures Account. Balance in such account is written off at the earliest but within the tenure of debentures. Since it is a capital loss it is written off from Capital Reserve, if it has a balance. If it has no balance, it is written off from Securities Premium Reserve and/or from Statement of Profit and Loss.

• Disclosure of Unamortised Discount (loss) on issue of Debentures:

Since the balance in such account is written off over the life of debentures but within the tenure of debentures, it will have a debit balance. It will be disclosed in the books as follows:

1. Under Current Assets: That part of unamortised discount or loss on issue of debentures which is to be written off within a period of 12months from the date of Balance Sheet or within the period of Operating Cycle is shown in the Balance Sheet under the head ‘Current Assets’ and sub-head ‘Other Current Assets’.
2. Under Non-Current Assets: That   part of unamortised discount or loss   on issue of debentures which is to be written off after a period of 12months from the date of Balance Sheet or after the period of Operating Cycle is shown in the Balance Sheet under the head ‘Non-Current Assets’ and sub-head ‘Other Non-Current Assets’.

• Accounting Entries: Entries can be explained as follows:

• If amount of debentures is received in Lump Sum:
• For receipt  of Application Money:

Bank A/c …Dr. (With application money received)

To Debentures Application and Allotment A/c

• For allotment of Debentures:

Debentures Application and Allotment A/c … Dr. (With the amount of application money on the allotted debentures)

To %Debentures A/c

• For Refund of Excess Application Money:

Debentures Application and Allotment A/c … Dr. (With the application money refunded)

To Bank A/c

• If amount of debentures is received in instalments:
• For receipt of Application Money:

Bank A/c … Dr. (With application money received)

To Debentures Application A/c

• For allotment of Debentures:

Debentures Application A/c … Dr. (With the amount of application money on the allotted debentures)

To % Debentures A/c

• For adjustment of Excess Debentures Application Money:

Debentures Application A/c … Dr. (With surplus application money on partially accepted applications)

To Debentures Allotment A/c

• For Refund of Excess Debentures Application Money:

Debentures Application A/c … Dr. (With the application money refunded on rejected applications)

To Bank A/c

• For Allotment Money Being Called:

Debentures Allotment A/c … Dr. (With the amount due on Allotment)

To% Debentures A/c

• For receipt of Allotment Money:

Bank A/c … Dr. (With the amount actually received on allotment)

To Debentures Allotment A/c

vii. For calls money being called:

 Debentures Call A/c … Dr.  (With the money due on call)

To% Debentures A/c

• For receipt of call money:

 Bank A/c … Dr. (With amount received on call)

To% Debentures Call A/c

• Section 52(2) of the Companies Act, 2013 on use of the amount received as premium on securities: As per section 52(2) of the Companies Act, 2013, use of the amounts received as premium on securities is restricted to the following purposes only:

1. Issuing fully paid bonus shares to the members.
2. Writing off preliminary expenses of the company.
3. Writing off the expenses of, or the commission paid or discount allowed on any issue of securities or debentures of the company.
4. Providing for the premium payable on the redemption of any redeemable Preference Shares or any debentures of the company.
5. In purchasing its own shares i.e., in case of buy back of shares.

• Disclosure of Securities Premium Reserve: It is shown in Equity and Liabilities Part of Balance Sheet under head ‘Shareholders’ Funds’ and sub-head ‘Reserves and Surplus’.
• Collateral Security: Loans taken are secured by mortgage of the assets which are known as prime or principal security. Security given in addition to the prime or principal security is termed as Collateral Security. Such security is realised by the lender only if the due amount cannot be recovered by realising the principal security.
• Disclosure of Debentures issued at Collateral Security in the Balance Sheet: Since it is for the loan of the company, such debentures issued as Collateral Security are shown in the Notes to Account in which the loan secured by debentures is shown.
• Accounting of Debentures issued as collateral security: When the debentures are issued as collateral security, they can be dealt in following 2 ways:

1. First Method: As per this method, entry for issue of such debentures is not passed in the books of account at the time of issuing such debentures. It is disclosed under the head Secured Loans in the Equity and Liabilities part of the Balance Sheet.
2. Second Method: As per this method, entry for issue of such debentures is passed in the books of account as follows:

Debentures Suspense A/c                             … Dr.

To % Debentures A/c

At the time when the loan is paid to the lender, this entry will be reversed to cancel or nullify the effect of entry already passed. In balance sheet, such debentures are disclosed separately from the other debentures.

• If the borrower fails to repay the loan: In case if the borrower fails to pay the loan along with interest, the lender can recover the amount due by selling primary security or by redeeming collateral security, i.e., debentures.

Accounting treatment for the same is as follows:

1. At the time of issuing the debentures as collateral security, no immediate liability is created and therefore, no journal entry is passed.
2. Liability arises when the lender exercises his right vested in the collateral security.

Following journal entries are to be passed as and when the lender exercises this option:

1. % Debentures A/c         … Dr.

To Debentures Suspense A/c

1. Loan A/c                             …Dr. (Principal)

Outstanding Interest A/c     …Dr. (Interest outstanding for the period intervening the date of default on the loan to date of invoking security by the lender)

To % Debentures A/c (Principal + Interest outstanding)

• Oversubscription of Debentures:

1. It is a situation where applications received for debentures is more than the number of debentures issued.
2. In such situation the company may make allotment by any of the 3 options available:

1. Rejecting excess applications.
2. Partial or Pro-rata allotment.
3. A combination of the above 2 alternatives.

1. Such excess application money received on account of oversubscription may be retained for adjustment towards allotment and the respective calls, in case of pro-rata allotment,  if so provided in the terms of issue.  However, in case of applicants to whom no debentures are allotted, such excess application money is refunded to the respective applicants.

• Undersubscritption of Debentures:

1. It is a situation where the applications received are for lesser number of debentures than the number of debentures offered for subscription.
2. In this situation, allotment is made to all the applicants.
3. In such situation where the allotment is made to all the applicants, Journal entries are passed for the number of debentures subscribed.

• Issue of Debentures for consideration other than Cash: Such issue is possible under the following circumstances where debentures are issued to:

1. Promoters for rendering their services: Such issue is made for services rendered by promoters for incorporating the company. Entry to be passed is as follows:

Incorporating Expenses A/c … Dr.

To % Debentures A/c

1. Vendors against purchase of assets or business: Entry to be passed is as follows:

• If debentures are issued for purchase of assets:

Sundry Assets A/c    … Dr.    (With agreed value of assets taken over)

To Vendor’s A/c

1. If debentures are issued for purchase of business: When a business is purchased, both assets and liabilities are taken over for a consideration which can be equal to, more than or less than the difference between values of assets and liabilities.

Entry to be passed in each of these cases is as follows:

1. If consideration is equal to the difference between the value  of assets and liabilities:

Sundry Assets A/c (individually) … Dr. (agreed value)

To Sundry Liabilities (individually) (agreed value)

To Vendor’s A/c (purchase consideration)

1. If consideration is more than the difference between the value of assets and liabilities, such excess is debited to Goodwill Account:

Sundry Assets A/c (individually) … Dr. (agreed value)

Goodwill A/c …Dr. (excess consideration over net assets)

To Sundry Liabilities (individually) (agreed value)

To Vendor’s A/c (purchase consideration)

1. If consideration is less than the difference between the value of assets and liabilities, such shortfall is credited to Capital Reserve Account:

Sundry Assets A/c (individually) … Dr. (agreed value)

To Sundry Liabilities (individually) (agreed value)

To Vendor’s A/c (purchase consideration)

To Capital Reserve A/c (excess of net assets over consideration)

• Accounting Entries for issue of Debentures to Vendors when debentures are:

• Issued at par:

Vendor’s A/c … Dr. (nominal value of debentures)

To % Debentures A/c

• Issued at premium:

Vendor’s A/c … Dr. (purchase consideration)

To% Debentures A/c (nominal value of debentures)

To Securities Premium A/c (premium amount)

• Issued at discount:

Vendor’s A/c … Dr. (purchase consideration)

Discount on Issue of Debentures A/c … Dr. (discount amount)

To% Debentures A/c (nominal value of debentures

• Calculation of Number of Debentures: When a business is purchased and consideration is paid in the form of issue of debentures, number of debentures is to be calculated as follows: