3.2 Query: Creation of Debenture Redemption Reserve.
1. A public limited company is a large manufacturer and marketer of chemical fertilizers, namely, urea, di-ammonium phosphate and complex fertilizers. All its manufacturing facilities are situated in the State of Goa. Its annual turnover is around Rs.200 crores.
2. The company privately placed non-convertible debentures, redeemable in seven years’ time, aggregating rupees seven crores, with financial institutions, during the accounting year 1989-90.
3. In compliance with the Guidelines for the Protection of the Interest of Debenture-holders, issued by the Ministry of Finance on 14th January, 1978, a Debenture Redemption Reserve (DRR) was created to the extent of Rs. 60 lakhs in the year ended 31st March,1990. The amount of Rs. 60 lakhs was arrived at as under:
(a) Total reserve to be created
50% of the amount of debenture issue: Rs. 3,50,00,000
(b) Period
Repayable after 7 years, therefore, reserve to be created in 6 instalments.
(c) Amount of Reserve
To be created every year for 6 years: 3, 50, 00,000/6
= Rs. 58, 33,333 (Rounded off to Rs. 60, 00,000)
4.According to the querist, under the guidelines issued by the Ministry of Finance, the debenture redemption reserve may be created either in equal installments (for the period before debenture redemption commences) or higher amounts if profits permit. Thus, only a minimum amount has been specified in the guideline and no maximum amount has been fixed. However, it is not clear to the querist, whether only the quantum of reserve may be varied during the period before debenture redemption commences and not the number of installments itself.
5. The querist has sought the opinion of the Expert Advisory Committee that in case the company now decides to create debenture redemption reserve for the balance 5/6th portion aggregating to Rs. 2,90,00,000 (being Rs.3,50,00,000 less Rs. 60,00,000) in one year, then:
(a) Whether a disclosure would be required in this regard either in the ‘Reserve and Surplus’ schedule or in the Notes to Accounts.
(b) Whether the auditor should, in their report, make a reference to such notes to accounts.
(c) Whether the Directors in their report, under section 217(1)(b), in relation to amounts carried to any reserves in the balance sheet, should explain creation of such reserve at an amount higher than that required in the normal course.
(d) If the reply to any of the above is in the affirmative, in what manner should the disclosure be made?
Opinion June 14, 1991
1. The Committee notes the Guidelines for the Protection of the Interest of Debenture-holders, issued by Ministry of Finance, Department of Economic Affairs, Office of the Controller of Capital Issues, vide No. F.11/(22)-CCI-(11)/86, dated 14.1.1987, which state, inter alia:
“The Government have been considering for sometime, issue of certain guidelines in the interest of debenture holders, which would facilitate the serviceability and repayment of debenture to the debenture-holders in time. These guidelines have now been formulated and are enumerated below: -
I. Servicing of Debentures
A Debenture Redemption Reserve (DRR) shall be created by all companies raising resources through debentures on the following basis: -
(a)…………….
(b) The debenture redemption reserve may be created either in equal instalments for the remaining period or higher amounts if profits permit…………”[Emphasis supplied by Committee]
2. The Committee notes from para (b) of Part I of the Guidelines reproduced above that it is permissible under the above guidelines to create the debenture redemption reserve for an amount higher than the equated annual installment in any year if the profits of the company so permit.
3. The Committee notes that section 217 of the Companies Act states, inter alia:
“S.217.Board’s Report- (1) There shall be attached to every balance sheet laid before a company in general meeting, a report by its Board of Directors, with respect to-
(a) The state of company’s affairs;
(b) The amounts, if any, which it proposes to carry to any reserves in such balance sheet………..”
4. The Committee notes that section 217(1) (b) does not require the directors to explain the reasons for creation of reserve at an amount higher than what would have been required in the normal course. The Committee is of the view, that since the debenture redemption reserve of Rs. 2, 90, 00,000/= intended to be created by the company in one year is not in contravention of the Guidelines issued by the Government, it is not legally necessary to explain in the directors’ report, the creation of such reserve at an amount higher than that required in the normal course.
5. The Committee is accordingly of the following opinion in respect of issues raised in para 5 of the query:
(a) The amount of and the nature of the debenture redemption reserve should be disclosed in the normal manner in the financial statements. No additional disclosure is necessary for creation of such reserve at an amount higher than the equated annual instalment if the profits of the company so permit.
(b) Not necessary in view of (a) above.
(c) There is no legal requirement to explain, in the directors’ report, the creation of the said reserve at the higher amount if the profits of the company so permit.
(d) This does not require any answer in view of (a), (b) and (c) ______________________________ |