What is a sinking fund?

Meaning: A large amount is required after a particular period to make a lump sum payment of debentures. To meet this requirement, a Sinking Fund is created every year by transferring a certain amount of profit from the excess of the 'Profit and Loss Statement' or 'Profit and Loss Statement'. The amount transferred to this fund is invested in external securities every year. In addition, the interest received from external securities is also invested in external securities every year. At the time of redemption of debentures, all investments are sold and the proceeds are used for the solvency of debentures.

Sinking Fund

The annual amount to be carried to the Sinking Fund should be such that, when appropriated at the prescribed rate of compound interest, it becomes equal to the amount to be paid for the debentures at the end of the term of the debenture. . This amount can be worked out by the Sinking Fund Table after knowing the amount of loan, the period of repayment and the rate of interest. The balance of this account was transferred to the General Reserve.

Step-by-step actions used in the working of the solvency method

1. Calculate the amount of profit from the redemption fund table which will be written off every year on yearly basis.

2. The amount of profit is written off or transferred or debited at the end of each year and credited to Debenture Redemption Fund Account or Sinking Fund Account

(Credit) is done.

3. Investments/Securities equal to a certain amount of profit written off at the end of the first year are purchased and transferred to Debenture Redemption Fund Investment A/c or Sinking Fund Debit is done in Fund Investment A/c.

4. Interest is earned on investment at the end of each subsequent year.

5. Investments/Securities equal to a certain amount of written-off profit with interest accrued every year except in the last year or the year of amortization.

6. Interest is received on the investment in the last year.

7. In the last year a certain amount of profit is written off or transferred or debited and credited to Debenture Liquidation Fund account.

8. The money is recovered by selling all the investments/securities at the end of the redemption year or the last year.

9. Profit/Loss on sale of investments reflected by the balance in Debenture Liquidation Fund Appropriation Account or Redemption Fund Appropriation Account is transferred to Debenture Liquidation Fund Account

10. The debenture holders are paid.

11. Lastly, the balance in the Debenture Liquidation Fund Account or the Redemption Fund Account is usually transferred to the General Reserve Account.

what is debenture

The debenture is a certificate of a loan of fixed equal amounts issued by the company, through which the company approves the loan taken from the public under its common currency. Debenture refers to the loan taken by the company. Its holder is called a debenture holder.

The terms of the loan (amount of loan, rate of interest, time to pay interest, tenure of loan, mode of repayment, etc.) are mentioned on the debenture. The rate of interest is mentioned on the front of the debenture; For example, 12% Debentures (12% Debentures). Debentures are issued at par, premium or deduction. The company liquidates the debentures by converting the debentures into shares or by paying in cash.

Features of Debentures

The salient features of debentures are generally:

1. A debenture is a written document issued by the company and accepted in public currency.

2. It is a certificate of taking a loan from the company.

3. The rate of interest, tenure, mode of solvency, etc. on this is pre-determined. Is.

4. Its interest payment is timely (six months) 5. Debentures are generally secured.

6. Debentures are issued at par, premium, or discount.

7. There is no forfeiture of debentures.

8. Debentures are liquidated by payment in cash or by converting them into shares.

9. Debenture is the liabilities of liabilities the creditor's security of the company, it is titled 'Equity and Liability' in the balance sheet of the company.

It is shown under 'Non-current liabilities.

10. The company can buy its debentures as an investment. 11. Interest is payable on debentures, whether profit or loss to the company.

12. The holder of the debenture does not have the right to vote and take part in the management of the company.

nature of debenture

Following are the general nature of debentures

1. Debentures represent long-term debt capital.

2. Through debentures, secured long-term capital is obtained at an affordable cost (interest rate).

3. Companies having good solvency issue debentures through their common currency.

4. The terms and conditions of the loan are mentioned on the debenture.

5. It is issued at par, premium or discount.

6. The redemption of debentures is done by converting it into cash or shares.

7. The debenture holder is the debenture holder. It is the creditor of the company. It does not have the right to vote and participate in the management of the company.

8. In the event of winding up of the company, the capital is returned to the shareholders after payment of the debenture amount.

9. Debentures cannot be forfeited.

10. Debentures are liquidated during the life of the company.

types of debentures

1.types of debenture transferability or on an account basis

(1) Registered Debentures

Those debentures which are issued under the Companies Act. And which are entered in the register of debenture holders of the company are called registered debentures. The principal of these debentures and the interest payable thereon are paid only to the registered debenture holders of the company.

(2) Bearer Debentures

These debentures, which are not entered in the register of debenture holders of the company and which are transferred only by delivery, are called bearer debentures. The principal and interest of these debentures are paid to their bearer. Coupons are attached to the bearer debentures, which are presented to the bank and the bearer receives the interest amount from the bank.

types of debenture on the basis of security

(1) Secured or Mortgaged Debentures

Those debentures which are secured by charge on the movable or immovable property of the company, are called secured or mortgaged debentures. If the company fails to pay the interest or principal amount due to the debenture holders, the debenture holders can recover their compensation by way of encumbrance or sale of the mortgaged property. It is mandatory for all debentures issued in India to be secured.

(2) Unsecured or Simple or Naked Debentures

Those debentures on which no security of the company is charged for the interest and principal due, are called unsecured or simple or naked debentures. It is only a certificate of credit. They are treated as ordinary creditors at the time of winding up of the company. These debentures are no longer in circulation.

types of debenture On the basis of Redemption

(1) Redeemable Debentures

Those debentures, which are done after a certain period by the company on demand or by giving notice to the debenture holders, are called redeemable debentures. The company pays off these debentures during its lifetime. Generally, the company issues salvageable debentures.

2) Irredeemable Debentures

Those debentures which are rectified on the dissolution of the company are called bad debentures. The company pays interest on them regularly.

types of debenture On the basis of Convertibility

(1) Convertible Debentures

Debentures Those debentures which are liquidated at the discretion of the debenture holders by converting them into equity shares or other securities are called convertible debentures. This change takes place in a given time period according to the prescribed conditions. These debentures are quite popular.

(2) Non-convertible Debentures

Those debentures which are not redeemed by converting equity shares are called non-convertible debentures.

types of debenture On the basis of Coupon Rate (Interest)]

(1) Specific Coupon Rate Debentures

When the debentures are issued at a pre-determined rate of interest, which is called Coupon Rate, then it is called Special Coupon Rate Debentures. This rate is fixed or floating. Generally, the floating rate is linked to the bank rate. Such debentures are generally issued by companies.

(2) Zero Coupon Rate Debentures (Bond)

These are issued at exorbitant deductions. The difference between its issue price and nominal value is the interest for the term of the debentures

what is the redemption of debentures

Meaning of redemption of debentures

Redemption of debentures means to relieve the debenture holders from the liabilities on the debenture/bond accounts by redemption (repayment) of debentures. Generally, redemption of debentures takes place at the end of the period based on the terms and conditions of the issue.

Sources of solvency (finance) of debentures

A huge amount is required for the solvency of debentures. A company uses a

321`ny one or more of the following instruments for the liquid the action of debentures:

(1) New issue of share capital and debentures

A new liability can be created in place of existence ng liability by incorporating of new capital. The company can issue new shares of debentures and their proceeds can be used for the liquidation of debentures. Through this method, the company maintains its level of working capital. The issue of fresh shares/debentures can be done at par, premium or discount. In this situation, there is no need to create a debenture solvency reserve.

(2) Redemption from accumulated profits and redemption funds

The company may face financial difficulties at the time of liquidation of debentures. To avoid these difficulties, the company retains some of its annual profits for liquidation of debentures and gives it to:

(a) invests in business under internal finance;

(b) invests in securities marketable out of business.

(3) Redemption from surplus funds

Excess funds of the company can also be used for the redemption of debentures, that is, the company can buy its own debentures from its surplus funds.

(4) Redemption from the sale of assets

The company can liquidate debentures from the amount received from the sale of immovable properties. This is an unusual source of obtaining finance for the liquidation of debentures and adversely affects the reputation of the company.