REDEMPTION OF DEBENTURES

MEANING:- Redemption of Debentures means discharging the liability on account of

debentures issued by a company by making repayment to the debenture holders. Debentures

are normally redeemed on the due date or earlier as per the terms of issue. Debentures may be

redeemed in installments, i.e., by draw of lots or by purchase from the open market for

cancellation or by conversion into shares or new debentures.

At the time of redemption, following should be kept in mind:

1. Time of Redemption of Debentures: Debentures are normally redeemed on the due date. A

company may, if authorised by the terms of issue, redeem the debentures before the due date

in instalments, i.e., by draw of lots and if authorised by its Articles of Association or by purchase

from open market for cancellation.

2. Amount of Redemption of Debentures: if the debentures are redeemed on maturity by

payment of whole amount or by draw of lots, the amount payable is as per the terms of issue,

i.e., at par or at premium.

3. Sources of Redemption of Debentures: The sources of redemption of debentures may be

any of the following:

(a) Out of Capital: It means redemption of debentures without transfer of any profit from

Surplus(statement of profit and loss). Redemption only out of capital is not possible under the

present law because the Companies Act, 2013 prescribes companies( other than those

exempted from creating Debentures Redemption Reserve) to transfer amount of profits

available for distribution as dividend as specified in Rule 18(7) (b) of the Companies (Share

Capital and Debentures) Rules, 2014.

(b) Out of Profit: It means redemption of debentures only out of profits. In this case companies

transfer 100 per cent of nominal (face) value of total redeemable debentures to Debentures

Redemption Reserve out of the surplus available for payment as dividend to the shareholders.

(c) Out of Profit and Capital: It means redemption of debentures partially out of profit and

partially out of capital. Where the company does not transfer 100 per cent of nominal (face)

value of outstanding debentures to Debentures Redemption Reserve out of the surplus

available for payment as dividend to the shareholders, it is known as redemption out of profit

and capital.

DEBENTURES REDEMPTION RESERVE (DRR) AND DEBENTURES REDEMPTION INVESTMENT (DRI)

Debentures Redemption Reserve (DRR):-- Debentures Redemption Reserve (DRR) is a reserve

set aside out of profits available for distribution as dividend for the purpose of redemption of

debentures. The amount is transferred to Debentures Redemption Reserve (DRR) before the

process of redemption of debentures begins. The process of redemption begins with setting

aside (creating) Debentures Redemption Reserve (DRR) out of profits available for distribution

as dividend. Besides the transfer of amount to DRR, Rule 18(7)(c) of the Companies (Share

Capital and Debentures) Rules, 2014 prescribes that the company required to create DRR shall

invest amount in securities specified. However, few kinds of companies (discussed later) are

exempt from transferring amount to DRR.

Need for Debentures Redemption Reserve (DRR):-- The Companies-Act, 2013 [Section 71(4)]

prescribes that

(i) Every company issuing debentures shall create Debentures Redemption Reserve (DRR);

(ii) Out of its profits available for distribution as dividend; and (iii) The amount credited to DRR

shall not be utilised by the company except for redemption of debentures.

Rule 18(7)(b) of the Companies (Share Capital and Debentures) Rules, 2014 prescribes that a

company shall transfer at least 25 per cent of the nominal (face) value of the outstanding

debentures to DRR.

Debentures Redemption Reserve is a specific reserve. A company can utilise DRR only for

redemption of debentures.

Exemption from Transferring Amount to DRR :-- The Companies Act, 2013 together with Rule

18(7)(b) of the Companies (Share Capital and Debentures) Rules, 2014 exempts following class

or kinds of companies from creating DRR:

(i) All India Financial Institutions (AIFIs) regulated by the Reserve Bank of India; and (ii) Banking

Companies. (iii) Besides the exemption to above class or kinds of companies, DRR is not

required to be created on fully convertible debentures. And where the debentures are partly

convertible, DRR is created only on the non-convertible part of debentures. [Rule 18(7)(d) of

the Companies (Share Capital and Debentures) Rules, 2014]

Transfer of DRR to General Reserve:-- Debentures having been redeemed, DRR is transferred

to General Reserve. Rule 18(7)(b) prescribes that a company shall transfer at least 25 per cent

of nominal (face) outstanding debentures to Debentures Redemption Reserve. Thus, a company

has two options for transfer of Debentures Redemption Reserve to General Reserve as follows:

(a) Transfer proportionate amount after every redemption from Debentures Reserve to

General Reserve; or

(b) Transfer DRR to General Reserve after all the debentures have been redeemed.

Alternatively, if the company decides to transfer amount of DRR to General Reserve after all the

debentures are redeemed, DRR is transferred to General Reserve after redemption of all the

debentures.

Disclosure of Debentures Redemption Reserve (DRR) in Balance Sheet:-- Debentures

Redemption Reserve is shown in the Equity and Liabilities part of the Balance Sheet under the

main-head 'Shareholders' Funds' and sub-head 'Reserves and Surplus'.

Debentures Redemption Investment (DRI):--Another condition of the Companies Act, 2013 is

prescribed in Rule 18(7)(c) of the Companies (Share Capital and Debentures) Rules, 2014 for

redemption of debentures as follows:

"The company shall invest an amount at least equal to 15 per cent of the nominal (face) value

of debentures that shall be redeemed by the company by 31st March of next year and the

amount should be invested on or before 30th April of the current year."

It means that at least 15% of the nominal (face) value of the debentures to be redeemed

during the financial year (1st April to 31st March) should be invested by the company in any of

the specified securities on or before 30th April of that financial year.

The amount invested or deposited should not at any time fall below 15% of the amount of

debentures maturing by 31st March of the financial year.

It should be kept in mind that investment is to be made by those companies who are required

to create DRR. Thus, the exempted companies, i.e., AIFIs regulated by RBI and Banking

Companies, are not required to invest in specified securities. Also, investment is not required to

be made in specified securities, if the debentures are fully convertible. If the debentures are

partly convertible, investment is made of an amount that is at least equal to 15% of the non-

convertible part of the debentures. The amount invested or deposited shall not be used for any

purpose other than for redemption of debentures.

METHODS OF REDEMPTION OF DEBENTURES:-- Debentures may be redeemed:

I. in lump sum on maturity,

2. in instalments by draw of lots,

3. by purchase from open market, or

4. by Conversion.