The Corporate Affairs Ministry in India recently announced notable changes pertaining to the Debenture Redemption Reserve (DRR) requirement. The rationale behind the move is to facilitate a reduction in capital cost for companies issuing debentures, with a long-term view to enrich and deepen the bond market. This article examines these modifications, their implications, and the concept of DRR.
A Shift in DRR Requirement for Listed and Unlisted Companies
Previously, listed companies, Non-Banking Financial Companies (NBFCs), and Housing Finance Companies (HFCs) had a DRR requirement of 25% of the value of outstanding debentures in circulation. Following the ministry’s decision, this stipulation has been removed completely. In contrast, for unlisted companies, the mandatory DRR has been reduced from 25% to 10% of any outstanding debentures.
This alteration impacts both public issues and private placements of debentures. Prior to the change, listed companies were required to establish DRR irrespective of whether the debentures originated from public issues or private placements.
Implication for NBFCs and HFCs
For Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs), the former rules mandated the creation of a DRR only when there was a public issue of debentures. Under the revised regulations, these institutions are no longer required to have a DRR upon the opted public issue of debentures.
The Objective Behind the Amendments
The adjustments made by the government aim to create a level playing field among listed companies, NBFCs, HFCs, banking companies, and all-India financial institutions. Notably, the latter two entities are already exempted from DRR.
Additionally, the changes are envisioned to facilitate a reduction in the cost of capital raised by companies issuing debentures, thus significantly deepening and expanding the bond market.
| Earlier DRR Mandate for Listed Companies | New DRR Mandate for Listed Companies | Earlier DRR Mandate for Unlisted Companies | New DRR Mandate for Unlisted Companies |
|---|---|---|---|
| 25% | No requirement | 25% | 10% |
Understanding Debenture Redemption Reserve (DRR)
The concept of Debenture Redemption Reserve (DRR) originated from a protective provision added to the Indian Companies Act of 1956. This amendment, introduced in 2000, stipulates that Indian corporations issuing debentures must establish a debenture redemption service. The primary objective is to offer investors a safety net against the potential default risk of a company.
This protective measure is considered crucial because, unlike other forms of debt instruments, debentures are not backed by an asset, a lien, or collateral. Instead, they primarily rely on the issuer’s integrity and creditworthiness. Therefore, a DRR provides an additional assurance to investors who invest in such instruments.
