What is a 'Debenture Redemption Reserve'

A debenture redemption reserve is a provision that states that any Indian corporation that issues debentures must create a debenture redemption service to protect investors against the possibility of default by the company. The provision was added to the Indian Companies Act of 1956 during an amendment in the year 2000.

BREAKING DOWN 'Debenture Redemption Reserve'

A debenture is an unsecured debt instrument issued by corporations to borrow money at a fixed interest rate. To protect debenture holders against the risk of the default of the issuing company, Section 117C of the Indian Companies Act of 1956 requires every debenture issuer to create a capital reserve, known as the debenture redemption reserve, which will be funded by the issuer’s profit and loss account. Under the provision, debenture redemption reserves will be funded by company profits every year until the debentures are redeemed. The reserve is to be created out of the issuer’s divisible profits of at least 25% of the face value of debentures issued, before the start of redemption.

For example, assume a company issues debentures for a total amount of $10 million on January 10, 2017 with a maturity date of December 31, 2021. The debenture redemption reserve must be created with at least 25% x $10 million = $2.5 million before the date the debentures are set to mature. If a company does not create a reserve within 12 months of issuing the debentures, they will be required to pay 2% interest in penalty to the debenture holders. The company does not have to fund the reserve account immediately through one big deposit, as it has the option of crediting the account by an adequate amount every year to attain its minimum 25% requirement before redemption of the debentures.

In addition to the rules stipulated in the Companies’ Act of 2013, companies are also required to reserve or deposit, on or before April 30 each year, at least 15% of the amount of its debentures maturing on March 31 of the following year. These funds can be deposited in a scheduled bank or invested in corporate or government bonds. The funds are to be used in settling interest or principal payments on debentures maturing during the year, and cannot be used for any other purpose. Furthermore, the amount deposited or invested is not at any time to fall below 15% of the amount of debentures maturing during the fiscal year ending March 31.

Only debentures that were issued after the amendment in 2000 are subject to the debenture redemption service. Furthermore, not all companies are required to create a debenture redemption reserve. Entities that are exempt from initiating the debenture capital reserves include:

  • All India Financial Institutions (AIFIs) regulated by Reserve Bank of India (RBI)
  • Other Financial Institutions regulated by Reserve Bank of India
  • Banking Companies for both public as well as privately placed debentures; and
  • Housing Finance Companies registered with the National Housing Bank

In the case of partially convertible debentures, debenture redemption reserves are to be created for the non-convertible portion, as only that portion is redeemable.

RELATED TERMS
  1. Fully Convertible Debenture - FCD

    A fully convertible debenture is a debt security in which the ...
  2. Compulsory Convertible Debenture ...

    Compulsory Convertible Debenture (CCD) is a type of debenture ...
  3. Convertible Hedge

    A convertible hedge is a strategy where an investor buys a convertible ...
  4. Mandatory Redemption Schedule

    The mandatory redemption schedule includes specified dates when ...
  5. Hung Convertibles

    Hung convertibles are convertible securities with share prices ...
  6. Redemption Fee

    A redemption fee is a fee charged to an investor when shares ...
Related Articles
  1. Insights

    BlackBerry to Sell $605 Million of Convertible Debt to Fairfax (BBRY, FRFHF)

    Amid a shrinking hold on a weak smartphone market, BlackBerry continues to build out its money-losing handset business while shifting focus to software.
  2. Investing

    4 Factors to Know About Money Market Reform in 2016 (FII, BAC)

    Learn more about the impending implementation of the money market fund reform, including how it impacts individual and institutional investors.
  3. Investing

    7 Common Bond-Buying Mistakes

    Find out how to avoid the costly mistakes made in bond portfolios everywhere. Learn to minimize the risk of suffering low or negative returns when trading.
  4. Investing

    Income Funds 101

    Income funds don't have to be bonds, there are plenty to choose from. Read up on the types of income funds and whether they fit your investment needs.
  5. Retirement

    Can You Retire in India with $200,000 in Savings?

    India's cost-of-living ranks among the lowest in the world, but retiring there presents some challenges unrelated to finances.
  6. Investing

    Bank of America Clients Sell Stocks for 21 Straight Weeks Due to Redemptions (BAC)

    The bank's institutional clients have sold off stocks for a record number of consecutive weeks, thanks to increasing redemptions across the industry.
  7. Financial Advisor

    Money Fund Alternatives for 401(k) Plan Clients

    Upcoming changes to money market fund rules may trigger changes in options offered by many 401(k) plans. Here are some alternatives to consider.
  8. Investing

    How the Federal Reserve Devises Monetary Policy

    Learn about the tools the Federal Reserve uses to influence interest rates and economic conditions. Find out the types of action a central bank may take.
  9. Financial Advisor

    Money Market Mayhem: The Reserve Fund Meltdown

    This event serves as a stark reminder to investors about understanding their portfolios.
  10. Insights

    How the Federal Reserve Manages Money Supply

    The Federal Reserve was created to help reduce the injuries inflicted during the slumps and was given some powerful tools to affect the supply of money.
RELATED FAQS
  1. Preference shares vs. debentures

    Learn why preference shares are equity securities and debentures are debt securities. Understand the differences between ... Read Answer >>
  2. Why do commercial banks borrow from the Federal Reserve?

    Learn how commercial banks borrow from the Federal Reserve to meet minimum reserve requirements, and discover the pros and ... Read Answer >>
  3. What is the difference between the deposit multiplier and the money multiplier?

    Explore the deposit multiplier and the money multiplier, two fundamental concepts of Keynesian economics, and learn how they ... Read Answer >>
Trading Center