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Conversion of Debentures into Equity Shares

>> February 3, 2013

In simple words, conversion of debentures into equity shares means to convert loan liability into capital liability. After converting debentures into equity shares, debenture-holder becomes shareholder. He will get right to vote. Without liquidation, their invested money will not be refunded.

Conditions of Conversion of Debentures into Equity Shares 

1. When company issues debentures, company has to give the option of conversion debentures into equity shares.

2. Debenture-holders should notify his intention to convert in the written form to company before repayment of debentures in cash.

Reason Behind Conversion of Debentures into Equity Shares 

Sometime, company has no money in the pocket to pay the debt and interest on the debt. If company has issued optionally convertible debentures (OCD), then company can easily get the acceptance from debenture-holder for conversion their debt into shares without paying them cash for their loan and interest. We can give the example of   Kingfisher company, it has converted 70 million OCDs into shares.

Accounting Treatment on Conversion of Debentures into Equity Shares 

New equity shares can be issued to the debenture-holders at par, at discount or at premium when the conversion of debentures into equity shares process will be start. Liability of debentures which we are converting will not increase or decrease in case issue of shares at discount or at premium.

1. When Issue of equity shares at par.

At this time, we just convert the debenture liability into share capital liability.

At this time, we will pass the following journal entry

Debenture Account Dr.

Equity Share Capital Account Cr.

2. When Issue of Equity shares at discount 

Debenture Account Dr.

Discount on Issue of Shares Dr.

Share Capital Account Cr.

3. When Issue of Equity Shares at Premium 

Debenture Account Dr.

Share Capital Account Cr.

Share Premium Account Cr.

Video Lectures

Video Lecture - Part 1

In this part, you will introduction of this concept.

Video Lecture Part 2

In this part, I will you the demonstration the accounting treatment of this by a simple example. We recommend to see second part to understand above written lecture.

Working Note :

Following picture is showing that issued share capital and share premium must be equal to the converted debentures.

Important for Students : { This written and video lecture is the part of CS Accounting Notes and Corporate Accounting }

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