What are 'Debenture' and 'Debenture Redemption Reserve' ??
Dear Student,
Debentures are instruments to raise long-term debt, issued by a borrower company for acknowledging debt. It is an instrument in writing that specifies the rate and time intervals for payments of interest and terms and condition for repayment of principle amount of the debt.
Redemption of Debentures involves a huge amount of cash flow in form of payments to the debenture holders. Generally, it becomes very difficult for a company to bear such huge cash outflows on the day of redemption. Accordingly,every company maintains a reserve known as Debenture Redemption Reserve (DRR) for Redemption of Debentures. This reserve acts as a piggy bank in which a company transfers a portion of every year's profits.The whole amount in this reserve is used on the day of redemption.
As per Companies act, 2013,every company issuing debentures is required to create DRR of an amount that is equal to 25% of the total nominal (face) value of debentures that are redeemable by it. DRR is created out of profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debenture. Also, DRR is required to be created for Non - Convertible Debentures (NCDs) and non - convertible part of partly Convertible Debentures (PCDs).
Hope this answers your query!
Debentures are instruments to raise long-term debt, issued by a borrower company for acknowledging debt. It is an instrument in writing that specifies the rate and time intervals for payments of interest and terms and condition for repayment of principle amount of the debt.
Redemption of Debentures involves a huge amount of cash flow in form of payments to the debenture holders. Generally, it becomes very difficult for a company to bear such huge cash outflows on the day of redemption. Accordingly,every company maintains a reserve known as Debenture Redemption Reserve (DRR) for Redemption of Debentures. This reserve acts as a piggy bank in which a company transfers a portion of every year's profits.The whole amount in this reserve is used on the day of redemption.
As per Companies act, 2013,every company issuing debentures is required to create DRR of an amount that is equal to 25% of the total nominal (face) value of debentures that are redeemable by it. DRR is created out of profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debenture. Also, DRR is required to be created for Non - Convertible Debentures (NCDs) and non - convertible part of partly Convertible Debentures (PCDs).
Hope this answers your query!