Procedures and Methods for Issuing Debentures

Every company that has already sold enough shares eventually looks for a second source of long-term money – one that doesn’t dilute ownership. This is where debentures come in. A company borrows a fixed sum from the public, a bank, or an institutional investor and promises a fixed rate of interest along with repayment of the principal after a set period. But before any repayment conversation begins, the company first has to issue the debentures correctly. And issuing them isn’t a single, uniform process – companies can pay for what they receive in more than one way, price the debentures above or below their stated value, and collect the money in stages. Each choice leaves its own distinct trail in the books.

Two ways a debenture gets issued: for cash and for other consideration 🔗

Most debentures are issued the straightforward way – investors apply, pay money, and the company allots debentures against that payment. But a second, less obvious route also exists: a company can hand over debentures instead of paying cash, typically to settle the purchase of an asset or an entire business.

Issuing debentures for cash 🔗

This is the standard route. A company floats an offer – either to the general public through a prospectus or through private placement to a select group of investors – and interested parties pay money against application. Private companies in particular have no choice in the matter: a private company can issue debentures only through private placement, since public offers are reserved for listed and public companies. Once the funds are received and the board approves the allotment, debentures are issued and the amount is recorded as a long-term liability in the books.

Issuing debentures for consideration other than cash 🔗

Sometimes a company doesn’t want to pay cash for machinery, land, or an entire running business it is acquiring. Instead, it settles the bill by issuing debentures directly to the vendor or seller. No cash actually changes hands – the vendor becomes a creditor who is repaid, with interest, through the debentures received. These debentures are always issued fully paid up, since there’s no scope for collecting the amount in instalments from a vendor the way a public issue would allow with individual investors.

This route is common during mergers, business takeovers, or large one-off asset purchases where paying cash immediately would strain the company’s working capital. If the purchase price agreed with the vendor is higher than the value of assets actually taken over, the difference is treated as goodwill; if it’s lower, the difference goes to capital reserve – a distinction that matters when the accounts are audited later.

Collecting the money in instalments 🔗

When debentures are issued for cash, the company doesn’t always insist on the full amount upfront. Just like with share capital, it can call for money in stages – typically on application, on allotment, and then through one or more calls (first call, second call, and so on). Each stage is recorded separately: an application account is opened first, then transferred to the debentures account once allotment is confirmed, and each subsequent call is tracked until the debenture is fully paid up.

Alternatively, a company can ask for the entire face value in one shot at the time of application. Both approaches are legitimate; the choice usually comes down to how quickly the company needs the funds and how much certainty it wants around subscriber commitment before finalising the allotment.

Issuing debentures at par, at premium, or at discount 🔗

Once the payment route is settled, the next decision is pricing. A debenture carries a stated face value – say, ₹100 – but the price at which it’s actually sold doesn’t have to match that number exactly.

Issue at par 🔗

This is the simplest case. The debenture is sold for exactly its face value – a ₹100 debenture is issued for ₹100. No premium or discount adjustment is needed in the books; the full amount received is credited straight to the debentures account.

Issue at premium 🔗

Here the debenture sells for more than its face value – a ₹100 debenture issued at ₹110 carries a premium of ₹10. This extra amount is not treated as income. Instead, it’s credited to the Securities Premium Account, which is a capital reserve, not a revenue gain. This premium can be used for specific purposes only – such as issuing bonus shares, writing off preliminary expenses, or covering the discount allowed on a fresh issue of shares or debentures – and cannot simply be moved into general profits.

Issue at discount 🔗

The reverse situation: the debenture is sold below face value – a ₹100 debenture issued at ₹95, for instance. Unlike shares, which cannot legally be issued at a discount in India, there is no statutory cap on the rate of discount a company can offer on debentures, though the articles of association still need to permit it. This shortfall is treated as a loss and is written off gradually over the life of the debenture rather than charged entirely in the year of issue, since the borrowed funds benefit the company across that whole period.

How these transactions show up in the books 🔗

Regardless of whether the issue is at par, premium, or discount, the underlying pattern of entries stays consistent. Money received is debited to a bank account and credited to an application or allotment account; once allotment is finalised, that liability moves into the debentures account at face value, with any premium separately credited and any discount separately debited. When debentures are issued to a vendor instead of cash, the asset purchased is debited, the vendor’s account is credited with the purchase consideration, and the vendor’s account is then cleared by crediting the debentures account – again adjusted for premium or discount where applicable.

These entries might look mechanical, but they carry real consequences. Overstating the debentures account, misclassifying a discount, or crediting a premium to the wrong reserve can distort a company’s reported liabilities and reserves – issues that surface quickly during a statutory audit.

The legal guardrails companies must work within 🔗

Debenture issues in India don’t happen in a regulatory vacuum. Section 71 of the Companies Act, 2013 governs how debentures are issued, and it explicitly bars debentures from carrying any voting rights, regardless of how large the issue is. Companies issuing secured debentures also have to comply with prescribed rules on creating charges over assets, and – depending on the type of debenture and issuer – may need to set aside a Debenture Redemption Reserve out of profits to protect investors’ interests.

Debentures can broadly be secured, unsecured, convertible, or non-convertible, and companies are also free to issue them as collateral security against a bank loan, in which case they represent only a contingent liability that crystallises solely if the company defaults. Listed companies issuing debentures publicly carry an additional layer of compliance under SEBI’s listing regulations, on top of the Companies Act requirements.

Why getting the accounting right actually matters 🔗

None of this is bureaucratic box-ticking. A debenture holder is a creditor, not a shareholder – someone who is owed a fixed return regardless of how the company performs. Recording each issue accurately, whether it was for cash or for a vendor’s assets, at par, premium, or discount, keeps the company’s balance sheet honest about how much it actually owes and to whom. It also protects the company itself: incorrect entries can inflate reserves that don’t really exist, or understate liabilities in a way that misleads both auditors and future investors reading the financial statements. For students working through these entries, the underlying logic is always the same – trace where the money (or asset) came from, where it went, and how the face value, premium, or discount gets separated out along the way.

What do you think? If you were advising a company that needs machinery worth ₹5 lakh but is short on cash, would you recommend issuing debentures to the vendor directly, or raising the cash separately through a public issue first? And why might a company deliberately choose to issue debentures at a discount even though it means booking a loss?

References

1. https://taxguru.in/company-law/process-provisions-issuance-debenture-companies-act-2013.html
2. https://www.geeksforgeeks.org/accountancy/issue-of-debentures-for-consideration-other-than-cash/
3. https://www.geeksforgeeks.org/accountancy/issue-of-debenture-at-par-and-premium/
4. https://www.vedantu.com/commerce/issuing-debentures-at-discount
5. https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
6. https://www.indiafilings.com/learn/debentures-under-companies-act-2013