Redemption of Debentures as per Companies Act 2013 and its latest Amendments

Through this article, I intend to summarize relevant provisions relating to the Redemption of Debentures as per the Companies Act 2013 and its latest Amendments.

Sources of Redemption of Debentures  

The various sources out of which the debentures may be redeemed are:

1. Out of fresh issue of shares/Debentures
2. By utilization of a part of the capital
3. By utilization of profits
4. By conversion into shares/debentures
5. Out of proceeds from sales of fixed assets
6. By purchase of own debentures

Methods of Redeeming Debentures   

Following are some of the important methods of redeeming debentures :

1. Redemption by Lump-sum payment
2. Redemption by annual installment payment
3. Redemption by sinking fund method
4. Redemption by insurance policy method
5. Redemption by the purchase of own debentures in the open market
6. Redemption by conversion into new shares or debentures

When the company try to redeem debentures by resorting to any of the above methods after utilizing any one of the sources indicated above, it will take into consideration the following points

Companies Act 2013

Sec 71(1) A Company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption.

Sec 71(4) Where debentures are issued by a company under this Section, the company 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 utilized by the company except for the redemption of debentures.

Companies (Share Capital and Debentures) Rules,2014

Rule 18(1)

The company shall not issue secured debentures, unless it complies with the following conditions, namely:-

a. An issue of secured debentures may be made, provided the date of its redemption shall not exceed ten years from the date of issue :

(Provided that the certain classes of companies may issue secured debentures for a period exceeding ten years but not exceeding thirty years)

Rule 18(7)

The company shall create 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 a dividend;

b. the company shall create Debenture Redemption Reserve (DRR) in accordance with the following conditions:-

i. No DRR is required for debentures issued by All India Financial Institutions regulated by RBI and Banking Companies for both public as well as privately placed debentures. For other Financial Institutions within the meaning of clause (72) of section 2 of the companies, 2013, DRR will be as applicable to NBFC s registered with RBI.

ii. For NBFCs registered with the RBI under section 45-IA of the RBI (Amendment) Act,1997and for Housing Finance Companies registered with the National Housing Bank, the adequacy of DRR will be 25% of the value of outstanding debentures issued through a public issue as per present SEBI (Issue and Listing of Debt Securities) Regulations, 2008, and no DRR is required in the case of privately placed debentures.

iii. For other companies including manufacturing and infrastructure companies, the adequacy of DRR will be 25% of the value of outstanding debentures issued through the public issue as per present SEBI (Issue and Listing of Debt Securities) Regulations,2008 and also 25% DRR is required in the case of privately placed debentures by listed companies. For Unlisted companies issuing on a private placement basis, the DRR will be 25% of the value of outstanding debentures:

MCA, through 2019 August amendments, the provisions relating to the creation of Debenture Redemption Reserve (DRR) have been revised with the objective of;

a. removing the requirement for the creation of a DRR of 25% of the value of outstanding debentures in respect of listed companies, NBFCs registered with RBI and for Housing Finance Companies registered with National Housing Bank (NHB) both for public issue as well as private placements;

b. Reduction in DRR for unlisted companies from the present level of 25% to 10% of the outstanding debentures.

Companies (Share Capital and Debentures) Rules,2014

Rule 18(7)(c)

Every company required to create Debenture Redemption Reserve shall on or before the 30th day of April in each year, invest or deposit, as the case may be, a sum which shall not be less than 15%, of the amount of its debentures maturing during the year ending on the 31st day of March of the next year, in any one or more of the following methods, namely:-

i. in deposits with any scheduled bank, free from any charge or lien;

ii. in unencumbered securities of the Central Government or of any State Government.

iii. in unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act 1882

iv. in unencumbered bonds issued by any other company which is notified under sub-clause (f) of section 20 of the Indian Trusts Act, 1882