# Debenture Redemption Reserve (DRR) and Investment Requirements

## What is DRR?

The Debenture Redemption Reserve (DRR) is a reserve a company must create out of its profits to ensure it has funds available to redeem debentures when they fall due. The purpose is to protect debenture holders from the risk of default.

## DRR Requirements by Type of Company

Category of Company	Publicly Placed Debentures	Privately Placed Debentures
All India Financial Institutions (RBI-regulated)	Exempted	Exempted
Banking Companies	Exempted	Exempted
Listed Companies (other than AIFI/Banks)	Exempted (except NBFCs not registered u/s 45IA RBI Act & Housing Finance Companies not registered with NHB)	Exempted (with same exceptions)
Unlisted Companies (other than AIFI/Banks)	10% of Outstanding Debentures	10% of Outstanding Debentures (except NBFCs registered u/s 45IA RBI Act & Housing Finance Companies registered with NHB)

Memory tip: Banks and AIFIs are always exempt. Listed companies are generally exempt for both types. Only unlisted companies typically need to maintain DRR at 10%.

## Investment Requirements (15% Rule)

Applicable to:

Listed companies — in case of publicly placed debentures
Unlisted companies — in case of both publicly & privately placed debentures

### The 15% Rule

An amount equal to 15% of debentures maturing during the financial year ending 31st March of the next year must be invested or deposited in any of:

1. Deposits with scheduled banks — free from any charge or lien

2. Unencumbered securities of the Central Government or State Government

3. Unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of Section 20, or unencumbered bonds of companies notified under sub-clause (f) of Section 20 of the Indian Trusts Act, 1882

### Conditions on these Investments

❌ Cannot be used as security for loans or any other purpose
✅ Must only be used for redemption of debentures
The investment must not fall below 15% of maturing debentures
For partly convertible debentures, DRR is created only on the non-convertible portion

## Powers of Tribunal & Central Government

If the company fails to redeem debentures at maturity or pay interest, the Tribunal can order immediate redemption and payment.
A contract to take and pay for debentures can be enforced by a decree of specific performance.
The Central Government may prescribe procedures for: securing the issue, form of debenture trust deed, inspection of trust deed, and quantum of DRR.

Worked example

### Example 1

Example 1: XYZ Ltd, an unlisted company, has issued debentures worth Rs. 500 crore privately. The company is not an NBFC. Calculate the DRR required.

Solution: Since XYZ is an unlisted company and not an exempted NBFC/Housing Finance Co., DRR = 10% × Rs. 500 crore = Rs. 50 crore.

### Example 2

Example 2: ABC Ltd has Rs. 200 crore worth of debentures maturing in the next financial year (ending 31st March). Calculate the amount to be invested/deposited.

Solution: Investment required = 15% × Rs. 200 crore = Rs. 30 crore. This must be placed in scheduled bank deposits, unencumbered government securities, or specified securities/bonds under the Indian Trusts Act, 1882.

### Example 3

Example 3: A listed company has issued partly convertible debentures of Rs. 100 crore (Rs. 60 crore convertible, Rs. 40 crore non-convertible). On which portion is DRR created?

Solution: Although listed companies are generally exempt, where DRR applies, it is created only on the non-convertible portion of Rs. 40 crore. The convertible portion eventually becomes equity, so no redemption is required.

⚠️ Common exam mistakes

Confusing DRR (which is created from profits) with the 15% investment requirement (which is a separate liquid asset deposit).
Applying the 15% on the total outstanding debentures instead of only debentures maturing in the next financial year.
Forgetting that listed companies are exempted from DRR (except NBFCs/HFCs in specific scenarios).
Using DRR investments as security for loans — this is strictly prohibited.
Creating DRR on the convertible portion of partly convertible debentures.

Bare-Act text Section 71(4) read with Rule 18(7) of Companies (Share Capital and Debentures) Rules, 2014 · Companies Act, 2013 · click to expand

Where a company issues debentures under this section, it shall create a debenture redemption reserve account out of the 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 debentures.

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