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Meaning : Redemption of debentures means repayment of the due amount of

debentures to the debenture holders. It may be at par or at premium.

Time of Redemption
(a) At maturity : When repayment is made at the date of maturity of debentures which
is determined at the time of issue of debentures.
(b) Before maturity : If articles of association and terms of issue mentioned in
prospectus allows, then a company can redeem its debentures before maturity date.

Redemption Methods
(1) Redemption in Lump-sum : When redemption is made at the expiry of a specific
period, as per the terms of issue.
(2) Redemption by draw of lots : In this method a certain proportion of debentures
are redeem each, year, the debenture for which repayment is to be made is selected by
draw of lots.
(3) Redemption by purchases in open market : If articles of association of a
company authorize, it may purchases its own debentures from open market i.e. stock
Advantages of this Method
(1) When market price of own debentures is low than the redeemable value is less then
the amount payable on maturity.
(2) Decrease the amount of interest payable to outsiders.
(3) If term of issue is provided that debentures are to be redeemed at premiumthen
such premium can be reduced.

Sometimes company can purchases the debentures at more than the redeemable value
due to the following reasons:
1. To maintain the solvency ratio.
2. To utilize the surplus money or funds which are lying idle with the company.
3. When rate of interest on debentures is more than the current market rate of interest
on debentures in the industry.
Sources of Redemption of Debentures
1. Proceeds from fresh issue of Share Capital or Debenture holder.
2. From accumulated profit.
3. Proceeds from sale of fixed assets.
4. A company may purchases its own debentures out of its surplus funds.
Two terms which are used in the redemption of debentures :
1. Redemption out of capital : When a company has not used its reserve or
accumulated profit for redemption of its debentures, it is called redemption out of
capital, So company using this method have not transferred its profit to DRR A/c. But
as per SEBI guidelines it is necessary for a company to transfer 50% amount of
nominal value of debentures to be redeemed in DRR A/c before redemption of
debentures commence.

2. Redemption out of profit :Redemption out of profit means that adequate amount
of profits are transferred to DRR A/c from Statement of Profit & Loss before the
redemption of debenture commences. This reduces the amount available for dividends
to shareholders.
Debenture Redemption Reserve (DRR) : Section 71 (4) of the companies Act, 2013
requires the company to create DRR out of the profits available for dividend and the
amount created in DRR shall not be utilized for any purpose except redemption.
Rule 18 (7) of Companies (share capital and Debentures) Rules, 2014 requires the
following companies to create DRR of an amount equal to 25% of the value of
(i) NBFCs registered with RBI
(ii) Financial institutions other than all India Financial Institutions regulated by RBI.

(iii) Housing finance companies registered with National Housing Bank. DRR is
required for publicly three classes of companies, not for privately placed.
(iv) Any other company (whether listed or unlisted), DRR to be created for both
public and private placed debenture.
As per rule 18 (7) (c), every company required to create / Maintain DRR shall invest
or deposit before 30th April specified. Securities a sum which shall not be less than
15% of the amount of debentures, maturing for payment during the year ending 31st
March of the next year.

Exemption to create DRR:

(i) All India Financial Institutions regulated by RBI.
(ii) Banking Companies.

Redemption Methods : (1) Redemption in Lump-sum

Profits/Loss Prior to Incorporation:
When a running business is taken over from a date prior to its
incorporation/commencement, the profit earned up to the date of
incorporation/commencement (incorporation, in case of private company; and
commencement, in case of public company) is known as Pre-incorporation profit.

The same is to be treated as capital profit since these are profits which have been
earned before the company came into existence. In short, the profit earned after the
date of purchase of business is called Post-incorporation or Post-acquisition profit
and the profit earned before the date of purchase of business is termed as Pre-
incorporation profit.
For example, X Ltd. was incorporated on 1st April 2006, took over a running business,
Y Ltd., from 1st January 2006 and it closed its accounts on 31st December 2006. Now,
the company X Ltd. is entitled not only to the profit/loss made by Y Ltd. from 1st
April to 31st December 2006 but also to the profit/loss made by Y Ltd. from 1st
January 2006 to 31st March 2006.

Thus, any profit/loss made before the incorporation is known as Profit (Loss) Prior to
Incorporation which is treated as a capital profit and the same cannot be distributed
as business profit. Hence, it cannot be distributed by way of dividend.

The same is to be transferred to Capital Reserve or may be adjusted against Goodwill.

Loss prior to incorporation is treated as a capital loss and, hence, the same is shown
under the head Miscellaneous Expenditure in the assets side of the Balance Sheet.

Calculate the following two ratios:

(i) Sales Ratio:

Amount of sales should be calculated for the pre-incorporation and post-incorporation


(ii) Time Ratio:

It is calculated after considering the time period, i.e., one is required to calculate the
period falling between the date of purchase and the date of incorporation and the
period between the date of incorporation and the date of presenting final accounts.

Step III:

A statement should be prepared for calculating the amount of net profit before
and after incorporation separately on the following principle:

(i) Gross Profit should be allocated for the two periods on the basis of sales ratio
which will present the gross profit for the two separate periods, viz. pre-incorporation
and post- incorporation.
(ii) Fixed Expenses or expenses incurred on the basis of time, viz., Rent, Salary,
Depreciation, Interest, etc. should be allocated for the two periods on the basis of time

(iii) Variable Expenses or expenses connected with sales should be allocated for the
two periods on the basis of sales ratio.

(iv) Certain expenses, viz., partners salary, directors salary, preliminary expenses,
interest on debentures, etc. are not apportioned since they relate to a particular period.
For example, partners salary is to be charged against pre-acquisition profit whereas
directors remuneration, debenture interest, etc. are to be charged against post-
acquisition profit.

Holding Company

Meaning of Holding Company

A company may acquire either the whole or the majority of the shares of another
company so as to have controlling interest in such a company or companies. The
controlling company is known as the 'holding company' and the
so controlled company or the company whose shares have been acquired is known as
'subsidiary company' and both together are known as 'group of company'. Holding
companies are able to nominate the majority of the directors of subsidiary company.
The company gets such right which it purchase more than fifty percent shares of
another company. So, the holding company is one which controls one or more other
companies either by means of holding more than fifty percent shares in that company
or companies or by having power to appoint the whole or majority of the directors of
those companies. A company controlled by holding company is known as subsidiary

A holding company is a parent company that owns enough voting stock(more than
50%) in a subsidiary to make management decisions , influence and contorl the
company's board of directors.
However, holding companies that control 80% or more of the subsidiary's voting stock
gain the benefits of tax consolidation, which include tax-free dividends for the parent
company and the ability to share operating losses.

Subsidiary Company :

A subsidiary is a company that is controlled by a holding company or parent; this

means at least 50% of its stock is controlled by another company. This 50% or greater
stake gives the parent company control.

Capital profits and Revenue profit

The profits of the subsidiary may be divided into capital profit and revenue
profit. Profits existing in, or earned by, the subsidiary company upto the date of
acquisition of shares by holding company are capital profits or pre-acquisition profits
and the holding companys share of the same is to be calculated and shown separately
under the heading capital reserve.

The profits earned by the subsidiary after the purchase of shares by the
holding company are revenue profits or post acquisition profits and the holding
companys share of its is to be added to the profits of the holding company.

Cost of control

COST OF CONTROL (COC) is the amount paid by a holding company, sometimes at

a premium, for shares in its subsidiary company over and above the value they would
command as an investment, in recognition of the particular benefit, which the
company gains through control.

If the holding company purchases the shares of the subsidiary at a price above the face
value, the excess paid represents payment for cost of control or good will. This
amount of goodwill must further be increased by the holding companys share in the
capital loss or be reduced by this capital profits. If the price paid for the purchase of
shares is less than the paid up value, the remaining difference is the capital reserve.

Minority Interest

When some of the shares in the subsidiary are held by outside shareholders,
they will be entitled to a proportionate share in the assets and liabilities of that
company. The shares of the outsiders in the subsidiary is called minority interest.

Consolidated Balance sheet

The purpose of a consolidated balance sheet is to show the financial position of

a group consisting of a holding company and one or more subsidiaries. The
consolidated statements are report of a notional accounting entity which subsist on the
view that the holding and subsidiary companies are to be treated as one economic unit.

Amalgamation and Absorption

Amalgamation is a process in which two companies liquidate to create a new
company, which takes over the business of the liquidating companies. The transferor
companies lose their identity to form a new company (transferee company). It
includes absorption of one company by the other company. Accounting Standard 14,
issued by ICAI (Institute of Chartered Accountants of India) deals with Accounting for
Amalgamation. Methods of accounting for amalgamation are Pooling of interest
Method and Purchase Method.

In this process, the companies which go into liquidation is known as Amalgamating

Companies or Vendor Companies whereas the company which is newly formed is
referred to as the Amalgamated Company or Vendee Company.

The liquidating companies are of the same nature and size, who mutually decide to
wound up the company to form a separate legal entity with a new name. The
transferee company has the right over the assets and liabilities of the transferor
company. There are various advantages of amalgamation i.e. synergy, expansion,
reduction in competition, an increase in efficiency, etc. Amalgamation is divided into
two categories:

Amalgamation in the nature of merger: Two company merges to form a new


Amalgamation in the nature of purchase: One company purchases another


Definition of Absorption

The process in which one company acquires the business of another company is
known as Absorption. In this process, a smaller existing company is overpowered by
an existing larger company. No new company is established in absorption. There are
two companies involved in this process, i.e. the company who takes over the business
of the other company is known as Absorbing Company, and the company whose
business is taken over is known as Absorbed Company. AS 14, Accounting for
Amalgamation, governs the absorption of companies.

In this process, the weaker company looses its identity by merging itself with stronger
company. The transferee company exercises control over the transferor company. The
two companies differ in their size, structure, financial condition and operations. The
companies either mutually take the decision of absorption, or it can be a hostile

The main reason behind absorption is gaining synergy, expansion, and instantaneous

Purchase considerations:

AS-14 Accounting for Amalgamation para 3(g) of AS14 defines the term purchase
consideration as the aggregate of the shares and other securities issued and the
payment made in the form of cash or other assets by the transferee company to
the shareholders of the transferor company. In simple words, it is the price
payable by the transferee company to the transferor company for taking over the
business of the transferor company.