Debenture Redemption Reserve (DRR)-Clarification. - Companies Law - 09/2002

General Circular No: 09/2002 No.6/3/2001-CL.V Government of India Ministry of Law, Justice Company Affairs Department of Company Affairs 5th floor, `A' Wing, Shastri Bhavan, Dr. R.P. Road, New Delhi. Dated: 18.4.2002 To All Regional Directors All Registrars of Companies All Chambers of Commerce Reserve Bank of India Securities and Exchange Board of India Subject:- Debenture Redemption Reserve (DRR)-Clarification. One of the measures that the Central Government took to protect the interests of small investors in Companies Act was to insert Section 117C in the Companies (Amendment) Act, 2000 which contemplates the creation of security and liquidity to ensure timely repayment by companies on redemption of debentures and thereby afford protection to the debenture holders. Section 117C requires every company to create a Debenture Redemption Reserve (DRR) to which 'adequate amounts' shall be credited out of its 'profits' every year until such debentures are redeemed, and shall utilize the same exclusively for redemption of a particular set or series of debentures only. Thus, the quantum of DRR to be created before the redemption liability actually arises in normal circumstances should be 'adequate' to pay the value of debentures plus accrued interest (if not already paid), till the debentures are redeemed and cancelled. Since the Section requires that the amount to be credited as DRR will be carved out of profits of the company only, there is no obligation on the part of the company to create DRR if there is no profit for the particular year. The Department of Company Affairs (DCA) has received a number of representations from Public Financial Institutions, Non-Banking Financial Companies, Professionals, FICCI, CII, Chambers, etc. seeking clarifications in this regard. The matter was considered keeping in view the purpose of the introduction of Section 117C and the genuine problems likely to be caused to the NBFCs, All India Financial Institutions (AIFIs) and banks that deal in financial products and would find it difficult to create DRR after transferring 20% of the profits to Reserve Fund out of the divisible profits as already required by RBI norms. After taking into consideration the RBI directions/regulation on prudential norms applicable to banking companies, AIFIs and NBFCs, and the SEBI (Disclosure and Investor Protection), Guidelines, 2000, the Government hereby clarifies on adequate DRR and other related matters as under :- a. No DRR is required for debentures issued by All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking Companies for both public as well as privately placed debentures. For other FIs within the meaning of Section 4A, DRR will be as applicable to NBFCs registered with RBI. b. For NBFCs registered with the RBI under Section 45-IA of the RBI (Amendment) Act, 1997, 'the adequacy' of DRR will be 50% of the value of debentures issued through public issue as per present SEBI (Disclosure and Investor Protection) Guidelines 2000 and no DRR is required in the case of privately placed debentures. c. For manufacturing and infrastructure companies, the adequacy of DRR will be 50% of the value of debentures issued through public issue and 25% for privately placed debentures. d. Section 117C will apply to debentures issued and pending to be redeemed and as such DRR is required to be created for debentures issued prior to 13.12.2000 and pending redemption subject to clarifications issued herein. e. Section 117C will apply to non-convertible portion of debentures issued whether they are fully or partly convertible. Yours faithfully (E SELVARAJ) Joint Director (Tng) Ph: 338 9263