Debenture Redemption Reserve (DRR)

What Is a Debenture Redemption Reserve (DRR)?

A debenture redemption reserve (DRR) is a provision expressing that any Indian corporation that issues debentures must make a debenture redemption service with an end goal to shield investors from the possibility of a company defaulting. This provision was added to the Indian Companies Act of 1956 in an amendment presented in the year 2000.

The provision has since been refreshed throughout the long term by India's Ministry of Corporate Affairs to reflect new DRR requirements. While the reserve requirements began at half in March 2014, they were immediately brought down to 25% in April 2014. Beginning in 2019, they were brought down to 10% of the value of the outstanding debentures.

How a Debenture Redemption Reserve (DRR) Works

A debenture is a debt security that allows investors to borrow money at a fixed interest rate. This instrument is considered unsecured in light of the fact that it isn't backed by an asset, lien, or some other form of collateral.

Hence, to safeguard debenture holders from the risk of default by the responsible company, Section 117C of the Indian Companies Act of 1956 carried out the debenture redemption reserve (DRR) command. This command expects companies to set to the side in cash a certain percentage of the amount raised through the debenture issue in a special fund just to be utilized in extreme cases to repay their debt obligation as opposed to defaulting on the debenture.

In March 2014, the Ministry of Corporate Affairs (MCA) issued the Companies (Share Capital and Debentures) Rules expecting companies to lay out a DRR equivalent to something like half of the amount raised through the debenture issue. This was immediately different in April 2014 to 25%, an amount that would make it simpler for companies to raise capital nevertheless shield the interests of investors.

This capital reserve, which is to be funded by profits issuers generate consistently until the debentures are reclaimed, was brought down again in 2019, and must now address no less than 10% of the debenture's face value.

Illustration of a Debenture Redemption Reserve

We should expect a company issued $10 million in debentures on Jan. 10, 2021, with a maturity date of Dec. 31, 2025. In this case, a $1 million (10% x $10 million) debenture redemption reserve must be made before the debenture's date of maturity.

Companies that fail to make such reserves in no less than 12 months of giving the debentures will be required to pay 2% interest, in punishments, to debenture holders. Be that as it may, companies don't need to promptly fund the reserve account with one large deposit. Rather, they have the option of crediting the account by an adequate amount consistently to fulfill the 10% requirement.

Before April 30 of every year, companies are likewise required to reserve or deposit somewhere around 15% of the amount of its debentures that are due to mature on March 31 of the next year. These funds, which may either be deposited in a scheduled bank or invested in corporate or government bonds, are to be utilized to settle interest or principal payments on debentures developing during the year and can't be utilized for some other purpose.

Purposes behind diminishing the redemption reserve requirements from 25% to 10% incorporate the need to make it simpler for companies to raise capital and to assist with growing India's bond market.

Special Considerations

The debenture redemption service just applies to debentures that were issued after the 2000 amendment to Indian Companies Act of 1956. Also, companies falling under the accompanying four categories are out and out exempt from DRR requirements:

• All India Financial Institutions (AIFIs) regulated by Reserve Bank of India (RBI)
• Other financial institutions regulated by RBI
• Banking companies for both public and secretly positioned debentures
• Housing finance companies registered with the National Housing Bank

With to some degree convertible debentures, debenture redemption reserves must just be made for the non-convertible portion — the main redeemable portion. A company may not utilize funds allocated to the DRR for any purpose other than the redemption of debentures.

Features

• A company may just utilize the funds deposited in the DRR with the end goal of the redemption of debentures.
• A DRR requires the corporation to make a debenture redemption service to safeguard investors from the possibility of a company defaulting.
• A debenture redemption reserve (DRR) is a requirement forced on Indian corporations that issue debentures.
• This rule offers investors a measure of protection since debentures are not backed by an asset, a lien, or some other form of collateral.
• The reserve must address no less than 10% of the face value of debentures issued.