When debentures are converted into equity shares, it’s a non-cash transaction. The company doesn’t receive or pay any cash. Instead, it’s an accounting adjustment:
The debenture liability is removed from the balance sheet.
The equity share capital increases by the value of the shares issued.
Step 2: Determine the Cash Flow Impact
Since no cash changes hands during the conversion:
It’s not an inflow of cash (no cash is received).
It’s not an outflow of cash (no cash is paid out).
Cash and cash equivalents (like bank balances) are unaffected because there’s no cash movement.
This is a no flow of cash transaction, as it’s just a book entry adjusting liabilities and equity.
Step 3: Accounting Perspective
In accounting:
The balance sheet shows a decrease in debentures (liabilities) and an increase in share capital (equity).
This transaction doesn’t appear in the cash flow statement because it’s a non-cash financing activity.
It may be disclosed in the notes to the financial statements as a significant non-cash transaction.
Evaluate the Options
Let’s check the options:
Option 1: Inflow of Cash: Incorrect, as no cash is received.
Option 2: Cash and Cash Equivalents: Incorrect, as cash and cash equivalents are not impacted (no change in cash occurs).
Option 3: Outflow of Cash: Incorrect, as no cash is paid out.
Option 4: No Flow of Cash: Correct, as this is a non-cash transaction.
Final Answer
If debentures are converted into equity shares, it is a No Flow of Cash transaction, which matches Option 4.
