Debenture Redemption Reserve

Debenture Redemption Reserve
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Methods and techniques

Debenture Redemption Reserve is a kind of sinking fund which is created by enterprises in order to redeem the issued bonds. Bonds may be redeemed after a specified number of years or after a specified period of time from their issue in connection with the giving of a specified notice or an annual draw of lots[1].

The corresponding amount must be added to this profit reserve each year until such bonds are redeemed. The amount allocated to the redemption reserve will not be used by the company to redeem the bonds. In some cases, debt scripts may be redeemed with a premium. In such a case, the allocation of funds to the fund should be sufficient to pay both the amount of debentures and redemption premium. In the absence of a sinking fund, a provision should be made for the premium payable at maturity of the bonds[2].

Each time a debenture is redeemed, at least 50% of the debenture issue amount must be credited to the debenture redemption reserve account[3].

Duration of Debenture Redemption Reserve[edit]

Debenture Redemption Reserve should be created before the redemption begins. If the bonds are issued to finance a project, a bond redemption reserve may be created up to the date of commercial production in equal instalments or at a higher amount if profits permit. In the case of convertible issues by companies, the creation of Debenture Redemption Reserve will begin from the year in which the company makes profits for the remaining useful life of the bonds[4].

Debenture Redemption Reserve's mandatory[edit]

There can be a few cases where Debenture Redemption Reserve will not me mandatory. It can occur when[5][6]:

  1. Debentures have a maturity period of 18 months of less
  2. Debentures are fully convertible
  3. Debentures are issued by AllIndia Financial Institutions regulated by RBI
  4. Debentures are issued by Banking Companies
  5. Debentures are issued by NBFCs registered with RBI on private placement basis
  6. They are for infrastructure companies (i.e companies working in the business of developing, maintaining and operating infrastructure)

Footnotes[edit]

  1. Asish K (2018)
  2. Asish K (2018)
  3. Tulisian C.P (2007)
  4. Tulisian C.P (2007)
  5. Tulisian C.P (2007)
  6. Tulisian C.P, Tulisian B (2017)

References[edit]

Author: Angelika Załęska