Government Removed the Debenture Redemption Reserve Requirements for Listed Companies, NBFCs and HFCs

Tanya Verma

26 Jun, 2020

The Government has removed the Debenture Redemption Reserve, which was required before for Non-Banking Financial Companies {NBFCs}, Housing Finance Companies {HFCs} and Listed Companies. Also, the DRR requirement has been reduced to 10% of the outstanding debentures for Unlisted Companies.

What is Debenture Redemption Reserve?

A Debenture Redemption Reserve {DRR} is a provision which states that any Corporation / Organization that issues debentures must create a Debenture Redemption Service in order to protect the investors from the possibility of default from the company’s side/part.

A debenture is an unsecured loan certificate provided or issued by a company. It is a type of long term loans that a company can take. Normally, it is a type of loan that has to be paid in a specified period of time/date and comes with fixed interest rates.

The Securities and Exchange Board of India^[1] {SEBI} have provided certain guidelines regarding Debenture Redemption Reserve. The focal point of these guidelines includes;

• Every company needs to create Debenture Redemption Reserve {DRR} in case it issues debentures, redeemable after a certain period of time and more than 18 months from the date of issue
• The creation of Debenture Redemption Reserve {DRR} is compulsory only for non-convertible debentures and a non-convertible portion of partly convertible debentures
• Also, withdrawal is permissible from Debenture Redemption Reserve only after 10% of the debenture liability has already been reduced by the company
• A company should create DRR which is equivalent to at least 50% of the amount of the debenture issue before starting the redemption of the debenture

Case Scenario: What are the Changes?

The changes that are made are as follows;

• The requirement for the Debenture Redemption Reserve is removed for Non-Banking Financial Companies {NBFCs}, Housing Finance Companies {HFCs} and Listed Companies
• For the  Unlisted Companies, the DRR requirement has been reduced to 10% from 25% of the outstanding debentures
• The Ministry of Corporate Affairs {MCA} has amended the Companies {Share Capital and Debenture} Rules and made the changes effective
• Under the companies law, these type of entities, raising the money needed to create DDR and that requirement has now been removed
•  The changes are applicable to both public issues as well as private placements

The Reason for Taking Such Step by the Government

The major reasons for making these changes by the government are as follows;

• The changes will make it easier for NBFCs and listed companies to raise funds and deepen the nation’s bond market as stated by the government. In other words, the aim of making these changes is to reduce the cost taken for raising capital
• Also, the move will create or generate more level-playing fields between NBFCs and commercial banks.
• The aim of the amendments is “creating a level-playing field between NBFCs, HFCs and listed companies on the other hand and also between them and banking companies and all India financial institutions on the other, which are already exempted from DRR”
• Earlier, these entities were required to create a Debenture Redemption Reserve {DRR} on behalf of the money they raise, now after effect of the amendment there is no such requirement
• Till now listed companies needed to create a DRR for both the public issues and the private placements of debentures. Additionally, in the case of NBFCs and Housing Finance Companies needed to have DRRs when they opted for public issues of debentures. Now there are no such requirements

Conclusion

As an effect of the amendments in the Companies {Share Capital and Debenture} Rules the Listed companies, Non-Banking Financial Companies {NBFCs} and Housing Finance Companies {HFCs} do not need to create Debenture Redemption Reserve in any case, which was mandatory before. The government also reduced the DDR requirement in case of Unlisted companies to 10%, which was 25% before.