creation of DRR
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
31 October 2010
sir i m tutor, teach accountancy upto graduation........sir i m confused regarding guidelines creation of DRR..........help me.
31 October 2010
Debenture redemption reserve(DRR):
Section 117C of the Companies Act, 1956, was introduced in 2000 as a measure to protect the interest of debenture-holders. It requires every company which has issued debentures to create a Debenture Redemption Reserve (DRR).
As per this section, a company shall credit adequate amounts to DRR from its profits every year until such debentures are redeemed.
The amounts credited to the DRR shall not be utilized by the company except for the
redemption of debentures.
Recognizing the insertion of Section 117C, the Securities and Exchange Board of India
(SEBI), which had earlier prescribed separate requirement for creation of DRR by listed companies, has amended its earlier guidelines.
Now, the SEBI guidelines also require listed companies to create DRR as per Section 117C. Thus, both listed and unlisted companies are subject to the same requirements of Section 117C for creation of DRR.
Section 117C of the Companies Act, 1956, was introduced in 2000 as a measure to protect the interest of debenture-holders. It requires every company which has issued debentures to create a Debenture Redemption Reserve (DRR).
As per this section, a company shall credit adequate amounts to DRR from its profits every year until such debentures are redeemed.
The amounts credited to the DRR shall not be utilized by the company except for the
redemption of debentures.
Recognizing the insertion of Section 117C, the Securities and Exchange Board of India
(SEBI), which had earlier prescribed separate requirement for creation of DRR by listed companies, has amended its earlier guidelines.
Now, the SEBI guidelines also require listed companies to create DRR as per Section 117C. Thus, both listed and unlisted companies are subject to the same requirements of Section 117C for creation of DRR.
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31 October 2010
FAQ on DRR:
Q: As per Section 117C, a company should
credit adequate amounts to DRR. What
does this imply?
A: To clarify the applicability of Section
117C, the Department of Company Affairs
( now Ministry of Corporate Affairs)
issued General Circular No. 9/2002 dated
April 18, 2002. The Circular outlines the
the Department of Company Affairs
( now Ministry of Corporate Affairs)
issued General Circular No. 9/2002 dated
April 18, 2002. The Circular outlines the
following limits for adequacy of DRR in
case of certain classes of companies:
a) All India financial institutions regulated
by RBI and banking companies —
public issue, nil; private placement, nil.
b) NBFCs and other financial institutions
— public issue, 50 per cent; private
placement, nil.
c) Manufacturing and infrastructure
companies — public issue, 50 per cent;
private placement, 25 per cent.
For other companies, there is no
specific guidance in the Circular.
Q: Is the above limit fixed or can a company
create higher DRR as well?
A: The DCA Circular does not make it very
clear. However, the limits prescribed in the Circular for creation of DRR should be
considered as minimum and in case a
company desires to create higher DRR, it
can do so.
Q: Are companies not specified in the
circular required to create DRR?
A: Service companies or trading companies,
for which no specific percentages have
been laid down in the DCA Circular, are
also required to create DRR. Such companies would have to decide the
‘adequate amount’ for creation of DRR
after considering factors such as amount of debentures outstanding, tenure of
debentures and adequacy of profits,
including future projections, etc.
However, on a conservative side, it is
advisable for such companies to at least create DRR to the extent prescribed for
manufacturing companies.
Q: Section 117C requires DRR to be created
out of profits for the year. Is DRR
required if a company does not have any
profits during the year?
A: As per the DCA General Circular, there is no obligation on the part of a company to create DRR, if there is no profit for the particular year.
Q: What if a company has profits but the
same are not sufficient to create
‘adequate amount’ of DRR?
A: If the profits are not adequate, the
company should transfer the entire amount
of profit to DRR. If such profits are applied for payment of dividends, it could be interpreted as giving preference to equity holders as against debenture holders. This could be construed as a violation of law and a debt covenant.
Q: Do companies require to create DRR for
all types of debentures, including
convertible debenture?
A: The DCA Circular clarifies that Section
117C will apply only to the non-convertible portion of debentures issued, whether they are fully or partly convertible.
Q: What about short-term debentures?
A: On a reading of Section 117C, SEBI
guidelines and the DCA Circular, there is
no exemption from creation of DRR with
respect to short-term debentures. However,
since creation of DRR is done annually,
whereas short-term debentures may have
been paid before the annual accounts are
approved or shortly thereafter, keeping the spirit of the law in mind, it may not be necessary to create a DRR.
Q: Once debentures are extinguished, what
happens to the DRR?
A: The DRR may be transferred to P&L
surplus balance or the General Reserve
Account.
Q: As per Section 117C, a company should
credit adequate amounts to DRR. What
does this imply?
A: To clarify the applicability of Section
117C, the Department of Company Affairs
( now Ministry of Corporate Affairs)
issued General Circular No. 9/2002 dated
April 18, 2002. The Circular outlines the
the Department of Company Affairs
( now Ministry of Corporate Affairs)
issued General Circular No. 9/2002 dated
April 18, 2002. The Circular outlines the
following limits for adequacy of DRR in
case of certain classes of companies:
a) All India financial institutions regulated
by RBI and banking companies —
public issue, nil; private placement, nil.
b) NBFCs and other financial institutions
— public issue, 50 per cent; private
placement, nil.
c) Manufacturing and infrastructure
companies — public issue, 50 per cent;
private placement, 25 per cent.
For other companies, there is no
specific guidance in the Circular.
Q: Is the above limit fixed or can a company
create higher DRR as well?
A: The DCA Circular does not make it very
clear. However, the limits prescribed in the Circular for creation of DRR should be
considered as minimum and in case a
company desires to create higher DRR, it
can do so.
Q: Are companies not specified in the
circular required to create DRR?
A: Service companies or trading companies,
for which no specific percentages have
been laid down in the DCA Circular, are
also required to create DRR. Such companies would have to decide the
‘adequate amount’ for creation of DRR
after considering factors such as amount of debentures outstanding, tenure of
debentures and adequacy of profits,
including future projections, etc.
However, on a conservative side, it is
advisable for such companies to at least create DRR to the extent prescribed for
manufacturing companies.
Q: Section 117C requires DRR to be created
out of profits for the year. Is DRR
required if a company does not have any
profits during the year?
A: As per the DCA General Circular, there is no obligation on the part of a company to create DRR, if there is no profit for the particular year.
Q: What if a company has profits but the
same are not sufficient to create
‘adequate amount’ of DRR?
A: If the profits are not adequate, the
company should transfer the entire amount
of profit to DRR. If such profits are applied for payment of dividends, it could be interpreted as giving preference to equity holders as against debenture holders. This could be construed as a violation of law and a debt covenant.
Q: Do companies require to create DRR for
all types of debentures, including
convertible debenture?
A: The DCA Circular clarifies that Section
117C will apply only to the non-convertible portion of debentures issued, whether they are fully or partly convertible.
Q: What about short-term debentures?
A: On a reading of Section 117C, SEBI
guidelines and the DCA Circular, there is
no exemption from creation of DRR with
respect to short-term debentures. However,
since creation of DRR is done annually,
whereas short-term debentures may have
been paid before the annual accounts are
approved or shortly thereafter, keeping the spirit of the law in mind, it may not be necessary to create a DRR.
Q: Once debentures are extinguished, what
happens to the DRR?
A: The DRR may be transferred to P&L
surplus balance or the General Reserve
Account.
Message likes :
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Querist : Anonymous
Querist :
Anonymous
(Querist)
02 November 2010
thnx...
i m still confused sir...........i teach 12th standards' students redemption of debenture but there is no need to create DRR for infrastructure companies but law don't give such exemption
i m still confused sir...........i teach 12th standards' students redemption of debenture but there is no need to create DRR for infrastructure companies but law don't give such exemption
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