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Redemption of Debentures Out of Capital
It refers to the condition when the debentures are redeemed from the capital without utilising the profits for redemption. Such a condition results in no profit being transferred to the Debenture Redemption Reserve, a reserve that needs to be created as debentures cannot be redeemed entirely from the capital. SEBI has issued guidelines for the redemption of debenture by creating Debenture Redemption reserve. However, there are some industries that are exempted from creating a reserve and they are:
1. Companies that issue debentures with maturity of 18 months
2. Companies involved in infrastructure sector like maintenance, construction, business development activities
Redemption of Debenture Out of Profits
Debentures when redeemed out of profit does not utilize capital for redemption. It is mandatory to create a DRR before redeeming debenture. This rule has been created by SEBI (Securities and Exchange Board of India) and as per that a company should transfer an amount equal to 50% of debentures issued, to DRR before redeeming the debentures. Profit gets transferred to DRR from Profit and Loss Appropriation Account. This reduces the total profit and therefore this process is called Redemption of Debenture out of profits. DRR is shown under Reserve and Surplus section of Liabilities part of balance sheet. After all debentures are redeemed a DRR account is closed by transferring it to general reserve.