- Debenture Redemption Reserve
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Debenture Redemption Reserve (DRR)
- In order to protect the interests of retail investors in the cases where companies raising funds through Non- Convertible Debentures at high rates of interest have failed to pay their dues, the Companies Act mandated that companies must maintain a redemption reserve.
- As per the Companies (Share Capital and Debentures) Rules 2014, all listed companies, NBFCs, HFCs and unlisted companies were to create a DRR with 25 per cent of the value of outstanding debentures from their profits.
- A DRR ensures that a company sets aside a portion of its profits toward repayment of long-term NCDs out of its current profits.
- When a company that has issued NCDs goes bankrupt or faces a liquidity crunch, it usually defaults on its repayments to lenders.
In such cases, the existence of the DRR reduces the investment risk for the buyer of the debentures.