# Debenture Redemption Reserve (DRR) and Investment Requirements

DRR is a statutory cushion to ensure debentures can be redeemed at maturity. The required DRR varies by issuer category and debenture type (publicly vs privately placed).

## 1. DRR Requirements — Category-wise

Category	Publicly Placed Debentures	Privately Placed Debentures
All India Financial Institutions (RBI-regulated)	Exempted	Exempted
Banking Companies	Exempted	Exempted
Listed Companies (other than AIFIs / Banks)	Exempted	Exempted except: NBFCs not registered with RBI u/s 45IA and Housing Finance Companies not registered with NHB
Unlisted Companies (other than AIFIs / Banks)	DRR = 10% of Outstanding Debenture	DRR = 10% of Outstanding Debenture except: NBFCs registered with RBI u/s 45IA AND HFCs registered with NHB (exempted)

Mental shortcut: Banks & AIFIs are fully exempt. Listed companies are largely exempt. Only unlisted non-bank, non-AIFI companies must create the 10% DRR (with specific NBFC/HFC carve-outs for private placements).

## 2. Investment Requirements (15% Rule)

Applicable to:

Listed Companies — for publicly placed debentures
Unlisted Companies — for both publicly and privately placed debentures

### The Rule

An amount equal to 15% of debentures maturing during the financial year ending on 31st March of the next year must be invested or deposited in specified instruments by 30th April of the current FY.

### Permitted Modes of Investment/Deposit

(a) Deposits with any scheduled bank (free from charge/lien)
(b) Unencumbered securities of the Central Government or any State Government
(c) Unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of Section 20 of Indian Trusts Act, 1882, OR unencumbered bonds issued by any other company notified under sub-clause (f) of Sec 20

## 3. Restrictions on Investment

The investments cannot be used for securing loans or any other purpose.
They must be used only for redemption of debentures.
The investment must not fall below 15% of maturing debentures (top-up obligation if it does).
For partly convertible debentures, DRR is created only on the non-convertible portion.

## 4. Quick Decision Tree

```

Is issuer an AIFI or Banking Company?

YES → Fully exempt from DRR.

NO → Is issuer Listed?

YES → Generally exempt (except specified NBFC/HFC categories on private placement)

NO (Unlisted) → DRR = 10% of outstanding debentures

(NBFCs reg. with RBI u/s 45IA & HFCs reg. with NHB exempt on private placement)

```

Worked example

### Example 1

Example 1 (DRR for Unlisted): Unlisted Pvt Ltd has ₹100 crore outstanding privately placed debentures. It is NOT an NBFC. Compute the DRR.

Answer: DRR = 10% × ₹100 crore = ₹10 crore. The exemption for NBFCs/HFCs does not apply since it's not an NBFC/HFC. The unlisted-private-placement DRR rule applies in full.

### Example 2

Example 2 (15% Investment): A listed company has publicly placed debentures of ₹50 crore maturing during FY 2024-25. By 30th April 2024, what amount must be invested in permitted modes?

Answer: 15% × ₹50 crore = ₹7.5 crore must be invested by 30th April 2024 in scheduled bank deposits or unencumbered government/specified securities.

### Example 3

Example 3 (Banking Company): A scheduled commercial bank issues debentures of ₹500 crore. What DRR is required?

Answer: Nil. Banking companies are fully exempt from DRR requirements, regardless of whether the debentures are publicly or privately placed.

### Example 4

Example 4 (Partly Convertible): A company issues partly convertible debentures of ₹100 crore, of which ₹40 crore is convertible. What is the DRR base?

Answer: DRR is created only on the non-convertible portion = ₹60 crore. If the issuer is in an unlisted non-bank category, DRR = 10% × ₹60 crore = ₹6 crore.

⚠️ Common exam mistakes

Calculating DRR on the entire issue including the convertible portion — only the non-convertible portion attracts DRR.
Computing DRR for AIFIs or banks — both are completely exempt; students sometimes apply the 10% mechanically.
Treating the 15% investment rule as applying to TOTAL outstanding debentures — it applies only to debentures maturing in the next FY.
Forgetting that listed companies are generally exempt from DRR (the older 25% / 10% historical figures are outdated).
Allowing the invested amount to be used as security for loans — strictly prohibited; reserved solely for redemption.
Confusing the NBFC/HFC carve-outs — exemption depends on RBI registration u/s 45IA and NHB registration respectively.

Bare-Act text Rule 18(7) · Companies (Share Capital and Debentures) Rules, 2014 · click to expand

Rule 18(7) of Companies (Share Capital and Debentures) Rules, 2014 (extracts): The company shall create a Debenture Redemption Reserve for the purpose of redemption of debentures, in accordance with the conditions given below— (a) the Debenture Redemption Reserve shall be created out of the profits of the company available for payment of dividend; (b) the limits with respect to adequacy of Debenture Redemption Reserve and investment or deposits, as the case may be, shall be as under: ... every company required to maintain Debenture Redemption Reserve shall, on or before the 30th day of April in each year, in respect of debentures issued and maturing during the year ending on the 31st day of March of the next year, invest or deposit a sum which shall not be less than 15% of the amount of its debentures maturing during the said year ending on the 31st day of March of the next year in any one or more methods of investment or deposits specified.

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Debenture Redemption Reserve (DRR) and Investment Requirements (Rule 18, Companies (Share Capital and Debentures) Rules, 2014)

Worked example

⚠️ Common exam mistakes