GUIDELINES ON DEBENTURE REDEMPTION RESERVE
The object of Section 117C of
the Companies Act, 1956 as inserted by the Companies (Amendment)
Act, 2000 is to prevent default in redemption of debentures and
to afford protection to the debenture holders thereby protecting
the small debenture holders. The provision, which came into force
with effect from December 3, 2000, mandates :
"Where a company issues debentures
after the commencement of this Act, it shall create a debenture
redemption reserve for the redemption of such debentures, to which
adequate amounts shall be credited, from out of its profits every
year until such debentures are redeemed."
Soon after the Section came into
force, representations were received from Financial Institutions
and others and the matter was deliberated by the Union Minister
of Law, Justice and Company Affairs, Shri Arun Jaitley, followed
by Secretary, DCA. Public Financial Institutions, Non-Banking
Financial Companies, Professionals, Chambers of Commerce and Industries
sought for exemption from the provision. References were also
received from the Reserve Bank of India (RBI) and Ministry of
Finance giving their views in the matter. Elaborate discussions
were held with RBI and Securities and Exchange Board of India
(SEBI) who have been in the field of regulating NBFCs PFIs and
issues of debt instruments.
Since banks, All India Financial
Institutions and NBFCs are under the regulatory domain of RBI,
they are subjected to healthy prudential norms. They have an understandable
difficulty in complying with an over-rigorous definition of adequate
DRR over and above the prudential norms applicable to them. Keeping
in view of their genuine difficulties, the Government proposes
to issue a Circular on adequate DRR as under:
- For NBFCs registered with the
RBI under Section 45-1A of the RBI (Amendment) Act, 1997, 'the
adequacy' of DRR will be 50 per cent 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.
- For manufacturing and infrastructure companies,
the adequacy of DRR will be 50 per cent of the value of debentures
issued through public issue and 25 per cent for privately placed
debentures.
- Section 117C will apply to debentures issued and
pending to be redeemed and as such DRR is required to be created
for debentures issue prior to 13.12.2000 and pending redemption
subject to clarifications issued herein.
- No DRR is required for debentures issued
by All India Financial Institutions and Banking Companies, regulated
by RBI for both as well as privately placed debentures.
- Section 117C will apply to non-convertible portion
of debentures issues whether they are fully or partly convertible.
This clarification settles the definition on adequate
DRR and corporate sector is likely to feel as sign of relief in
the matter.
