Debenture Redemption Reserve & Investment – Simplified

Chapter IV: Section 71 of Companies Act, 2013 read with Rule 18 (7) of Companies (Share Capital and Debenture) Rules, 2014

Introduction: Delve into the intricacies of Debenture Redemption Reserve (DRR) and Debenture Redemption Investment (DRI) as mandated by Section 71 of the Companies Act, 2013. Understand the evolution of these provisions, exemptions for different categories of issuers, and the critical role they play in safeguarding debenture holders.

Issuing debentures is a method of funding used by companies to borrow funds for its short-term or long-term requirements. It is an instrument evidencing debt owed by a company to the holders of the instrument known as debenture holders. 

Debenture holders are vulnerable to the credit risk of the issuer company i.e. there is a possibility that the issuer may default in its obligation of repayment of its debts at the time of redemption.

In order to protect the debenture holders from this inherent risk, a provision for setting aside ‘adequate’ profits in the form of reserve was introduced in the Companies Act, 1956 by adding Section 117C vide Companies (Amendment) Act, 2000. This reserve is known as Debenture Redemption Reserve (DRR). 

According to this provision, every company issuing debentures was required to create DRR. Later through amendments, the Ministry of Corporate Affairs (MCA) has amended this provision to exempt certain types of companies from creation of DRR and has reduced the percentage of profit to be set aside from 50% to 25% to now standing at 10% of the value of outstanding debentures.

Further vide Circular No. 04/2013, MCA required issuers to park a certain percentage of funds in safe unencumbered securities/ deposits. This was made to ensure that actual funds are available for redemption and not just an accounting entry in the form of DRR.

The present applicability of DRR and DRI as per Rule 18 (7) is summarised below-

DRR Simplified-

1. No listed companies for Private Placement or Public Issue of NCDs, are required to create DRR.

2. All unlisted companies doing Private Placement of NCDs are required to create DRR, except

• AIFI
• Banks
• NBFC
• HFC
• Other Financial Institutions

Points to remember for DRR-

• DRR is required to be created whether or not the debentures are secured or unsecured subject to the provisions / exemptions provided in Rule 18(7) of Companies (Share Capital and Debenture) Rules, 2014.
• DRR to be maintained is 10% of value of outstanding debentures.
• It is required to be created out of profits of the company available for distribution of dividend (i.e. free reserves). Hence, loss making companies need not create a DRR.
• It is required to be created only for Non convertible debentures.
• If debentures are partially convertible then, DRR is required to be created only for the non convertible portion.
• The amount in DRR shall only be used for redemption of debentures.

DRI Simplified-

1. All listed Companies making Public Issue of NCDs are required to maintain DRI, except

• AIFI
• Banks

2. All unlisted cos making making Private Placement of NCDs are required to maintain DRI, except

• AIFI
• Banks
• NBFC
• HFC
• Other Financial Institutions

Points to remember for DRI-

• The amount of DRI should be 15% percent of the amount of debentures maturing during the year, ending on the 31st day of March of the next year.
• The said amount should be invested or deposited on or before 30th April of each year.
• Said amount can be parked –

1. as deposits in Scheduled Banks, 

2. in securities of Central/ State Government,

3. in unencumbered securities mentioned in sub-clause (a) to (d)and (ee) of section 20 of the Indian Trusts Act, 1882,

4. in unencumbered bonds issued by any other company which is notified under sub-clause (f) of section 20 of the Indian Trusts Act, 1882 .

• It should always be free from any encumbrances i.e. free of any lien or charge.
• The amount in DRI should not fall below 15% of the amount of debentures maturing during the year, ending on the 31st day of March of the next year at any time.
• The amount so invested shall only be used for redemption of debentures maturing during the year.

Conclusion- Introduction of DRR and DRI has helped ensure that issuer companies are in position to honour their obligation of redemption thus generating investor confidence. This is beneficial for the growth of the bond market in India which is still in a very nascent stage as compared to other countries. 

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Disclaimer:– The information provided is for educational purposes and should not be considered as professional advice. The author shall not be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.