CONVERSION OF DEBENTURES INTO SHARES :
According to the terms of issue of the debentures, the debentureholders may be given the right to exercise the option to convert their debentures into equity shares or preference shares at a stipulated rate within a specified period. If the debentureholders find the offer is beneficial to them, they will exercise their right and opt for shares, otherwise they may not exercise their right. According to section 71 of the Companies Act, 2013, a company may issue debentures with an option to convert debentures into shares either wholly or partly at the time of redemption.
For example, X Ltd. issued 12% Debentures at a discount of 10% and the debentureholders were given the right to exercise the option of converting the debentures into 14% Preference Shares of ` 100 each to be issued at a premium of 10%. The holders of ` 33,000 debentures expressed their willingness to exercise the option. In such a case, the number of preference shares to be issued in exchange of ` 33,000 debentures will be calculated in the following way:
Face value of debentures to be converted = 33,000
Less: Discount allowed @ 10% on issue = 3,300
Actual amount received on issue of the debentures = 29,700
Now, the issue price of preference shares will be as follows:
Face value of preference shares 100
Add: Premium @ 10% 10
110
Therefore, number of preference shares to be issued in exchange of Rs.33,000 debentures =Rs. 29,700/110 = 270
Thus, face value of 270 preference shares 27,000
Add: premium @ 10% 2,700
29,700
In case, the debentures are due for redemption, conversion of debentures into shares, may be made on the
basis of terms and conditions mutually agreed upon at the time of redemption. In such a case, even debentures
originally issued at a discount can be converted into shares on the basis of the nominal value of the debentures.
Accounting Entry for Conversion
At the time of conversion, new shares can be issued at par or at a premium only. As per Companies Act, 2013 issue of shares at discount is prohibited. The accounting entry for all these cases will be as follows:
1. If shares are issued at par
Debentures A/c Dr. with the nominal value of the
debentures converted
To Share Capital Account with the nominal amount of shares issued
2. If shares are issued at a premium
Debentures A/c Dr. with the nominal value of the
debentures converted
To Share Capital Account with the nominal amount of shares issued
To Securities Premium Account with the difference
Note: If the debentures to be converted were issued at a discount, Share Capital A/c should be credited with the amount of cash originally realised on the debentures and Discount on Issue of Debentures A/c should be credited with the amount of discount allowed on those debentures.
Illustration :
On 1st April, 2013, Green Ltd. issued 2500 12% Debentures of ` 100 each at ` 95. Holders of these debentures have an option to convert their holdings into 14% Preference Shares of Rs.100 each at a Premium of Rs.25 per share at any time within three years.
On 31st March, 2014, holders of 500 Debentures notified their intention to exercise the option.
Show the journal entries relating to the issue and conversion of debentures in the books of the company. Also show how the items affected would appear in the company’s balance sheet.
Solution:
Journal Entries
| Date | Particulars | Dr.(Rs.) | Cr.(Rs.) |
| 2013
April 1 |
Bank Dr. | 2,37,500 | |
| To 12% Debentures Application and Allotment A/c (Receipt of application money on 2,500 debentures @ ` 95 each) | 2,37,500 | ||
| “ | 12% Debentures Application Allotment A/c Dr. | 2,37,500 | |
| Discount on Issue of Debentures A/c .Dr | 12,500 | ||
| To 12% Debentures A/c
(Allotment of 2,500 debentures of `100 each issued at a discount of `5 each as per Board’s resolution dated….) |
2,50,000 | ||
| 2014 Mar. 31 |
12% Debentures A/c Dr. | 50,000 | |
| To Discount on Issue of Debentures A/c | 2,500 | ||
| To 14% Preference Share Capital A/c | 38,000 | ||
| To Securities Premium A/c (Conversion of 500 Debentures of ` 100 each issued at a discount of 5 each for 380 14% Preference Shares of 100 each at a premium of ` 25 each as per Board’s resolution dated….) | 9,500 |
Balance Sheet of Green Ltd. as at 31st March, 2014
| I. EQUITY AND LIABILITIES
(1) Shareholders fund |
| (a) Share Capital 1 | 38,000 | |
| (b) Reserve and Surplus 2 | 9,500 | |
| 2. Non- current liabilities | ||
| Long term borrowings 3 | 2,00,000 | |
| II. ASSETS | ||
| Non-current Assets | ||
| Other non-current assets 4 | 10,000 | |
| Notes | ||
| 1. Share Capital | ||
| 14% 380 Preference share of ` 100 each | 38,000 | |
| 2. Reserve and Surplus | ||
| Securities Premium Account | 9,500 | |
| 3. Long term borrowings | ||
| 2,000 12% Debentures of ` 100 each fully paid-up | 2, 00,000 | |
| 4. Other non-current assets | ||
| Discount on issue of shares | 10,000 | |
| Working Notes: | ||
| Number of 14% Preference Shares has been arrived at as follows: | ||
| ` | ||
| Amount received on issue of 500 debentures (500 x ` 100) | 50,000 | |
| Less: Discount allowed on 500 debentures (500 x ` 5) | 2,500 | |
| Amount actually received | 47,500 | |
| Issue Price of 14% Preference Shares: | ||
| Face value per share | 100 | |
| Add: Premium per share | _25 | |
| Issue price | 125 | |
| Therefore the number of preference shares issued in exchange | ||
| of ` 50,000 debentures | ||
| = 47,500/125 = 380 | ||
| Preference Share Capital = ` 380 x 100 = ` 38,000 | ||
| Securities Premium = 380 x ` 25 = ` 9,500. |
Note: Whether debentures were issued at discount or at premium becomes irrelevant if conversion into shares takes place at the time of redemption of debenture is due. Suppose in 2008 10,00,000 debentures were issued at a discount of 5% with a term of 6 years. If in 2013, when the redemption is due, debentureholders are allowed to convert the debentures into shares, the relevant amount will be the face value of the debentures (or rather the figure at which they are to be redeemed). If shares are to be issued at par, debentureholders will get shares equal to par value with the amount of the debentures to be converted.
Illustration :
Swathi Ltd.
Balance Sheet as at 1st April, 2014
| I. EQUITY AND LIABILITIES
(1) Shareholder’s fund (a) Share Capital 1 5,00,000 (b) Reserve and Surplus 2 12,50,000 (2) Non-current liabilities Long term borrowings 3 15,00,000 3. Current Liabilities Other current Liability 12,50,000 TOTAL 45, 00,000 II. ASSETS 1. Non-current assets (a) Fixed Assets Tangible (net) 18,00,000 (b) Non-current investment 4 4,00,000 2. Current assets Cash and cash equivalents 5,00,000 Other current assets 18,00,000 TOTAL 45,00,000 Notes 1. Share Capital Share capital of Z 10 each 5,00,000 2. Reserve and Surplus General reserve 7,50,000 Debenture redemption fund 5 00 000 12,50,000 3. Long term borrowings 12% convertible debentures 10,00,000 Unsecured loans 5 00 000 15,00,000 4. Non-current investment Debentures redemption fund investment 4,00,000 |
The debentures are due for redemption on 1st April, 2014. According to the terms of issue of debentures, they were redeemable at a premium of 5% and also conferred option to the debentureholders to convert 20% of their holdings into equity shares at a predetermined price of ! 15.75 per share and the payment in cash.
Assuming that:
- Except for 100 debentureholders holding 2,500 debentures, the rest of them exercised the option for maximum conversion.
- The investments realise ! 4,40,000 on sale and
- All transactions are put through, on 1st April, 2014.
You are required to redraft the balance sheet of the company as on 1st April, 2014 after giving effect to the redemption. Also show the number of equity shares to be allotted and the cash payment necessary.
Solution:
Working notes:
(i)Calculation of number of shares to be allotted:
Total number of debentures 10,000
Less: Numbers not opting for conversion 2.500
7,500
20% thereof to be …… into equity shares 1.500
Amount paid for 1,500 debentures i.e. 1500 x @ Z 105 1,57,500
Number of equity shares to be allotted:
1,57,500/15.75 = 10,000 shares of ! 10 each.
(ii) Calculation of cash to be paid:
Number of debentures 10,000
Less: Number of debentures to be converted into equity shares 1,500
Number of debentures to be redeemed 8,500
Redemption value = 8,500 x Z 105 = ! 8,92,500.
(iii) Cash at Bank:
Cash balance 5,00,000
Add: Sale of investment 4 40 000
9,40,000
Less: Cash paid to debenture holders 8 92 500
47,500
(iv)Calculation of General Reserve:
Opening of balance 7,50,000
Debenture Redemption Fund (transfer) 5 00 000
12,50,000
(v) Securities Premium:
Issue of shares on conversion 57,500
Less: Premium on Redemption of Debentures 50,000
7,500
Swathi Ltd.
Balance Sheet as at 1st April, 2014
| I. EQUITY AND LIABILITIES | ||
| (1) Share holder’s fund | ||
| (a) Share Capital |
1 |
6,00,000 |
| (b) Reserve and Surplus |
2 |
12,97,500 |
| (2) Non-current liabilities | ||
| Long term borrowings |
3 |
5,00,000 |
| 3. Current Liabilities | ||
| Other current Liability |
12,50,000 |
|
| TOTAL |
36,47,500 |
|
| II. ASSETS
1. Non —current assets (a) Fixed Assets |
||
| Tangible (net) |
18,00,000 |
|
| 2. Current assets | ||
| Cash and cash equivalents |
47,500 |
|
| Other current assets |
18,00,000 |
|
| TOTAL |
36,47,500 |
|
| Notes
1. Share Capital |
||
| Share capital of Z 10 each |
6,00,000 |
|
| 2. Reserve and Surplus | ||
|
Capital reserve |
40,000 |
|
| General reserve |
12,50,000 |
|
| Securities premium |
___7.500___ |
12,97,500 |
| 3. Long term borrowings | ||
| Unsecured loans |
5,00,000 |