2.3  Query:     

Amount to be transferred to Debenture Redemption Reserve.

1. A Public Sector Undertaking is registered under the Companies Act, 1956. One of the guidelines for the protection of interests of debentureholders issued by Ministry of Finance, Department of Economic Affairs of the Controller of Capital Issues, dated 14.1.87, is regarding the servicing of debentures. According to these Guidelines, inter alia, a Debenture Redemption Reserve (DRR) shall be created by all the companies raising resources through debentures on the following basis –

(i)         Company should create DRR equivalent to 50% of the debenture issue before redemption commences.

(ii)        DRR may be created either in equal instalments for the remaining period or higher amounts if profit permits.

2.  Section 2(12) of the Companies Act, 1956, defines a ‘Debenture’ as follows:

“Debenture includes debenture stocks, bonds and any other security of a Company whether constituting a charge on a assets of the Company or not.”

3.  The querist has informed that the company has raised the funds from the issuing of Unsecured Debentures and Bonds. The details regarding the outstanding balances as on 31.3.95 and repayables are prepared and submitted for the information of the Committee. On the basis of availability of profit after transferring the amounts into Special Reserve u/s 36(I)(viii) of Income-tax Act and payment of dividend under instructions of Ministry, DRR has been created to the extent of Rs. 114.39 crores as on 31.3.95, while as per the calculations on the basis of equal instalments of total period of redemption, the same are worked out at Rs. 585.84 crores. A copy of calculation sheet has been submitted by the querist for the perusal of the Committee.  It can be seen from the above that there is a shortfall of DRR with reference to the required level as per the notification. However, present DRR Rs. 114.39 crores as on 31.3.95 is sufficient to cover the redemption of Debentures/Bonds upto 1997.

4.  The querist has sought the opinion of the Expert Advisory Committee of the Institute in respect of the following:

(1)   Whether Debentures Redemption Reserve is applicable to Bonds also.

 

(2)   Whether para 1(ii) above for creating a minimum of equal instalments over the given period of debentures is mandatory.

 

(3)   Since 100 percent shares of the company have been held by the Government, whether dividend can be declared and paid out of available profit before transferring to DRR, if demanded by the Government.

 

(4)     Whether a transfer to Research & Development Reserve before transferring to DRR can be made. The object of R & D Reserve is to distribute grants to borrowing agencies.

                                                                                        Opinion                     February 2, 1996

1.  The Committee has given its following opinion only on the issues raised by the querist in para 4 of the query, i.e., only those issues related to the SEBI’s Guidelines for the Protection of the Debentureholders (Section N of the SEBI’s Guidelines for Disclosure and Investor Protection, since the Guidelines issued by CCI are no longer in force. The opinion is also subject to provisions of other relevant laws. The Committee has also not gone into actual computations and, therefore, its opinion is on principles involved.

2. The Committee notes the aforesaid Guidelines for the protection of Interest of Debenture holders which, inter-alia, require as below:

“(a) A moratorium upto the date of commercial production can be provided for creation of the debenture redemption reserve in respect of debentures raised for project finance.

 

(b) The debentures redemption reserve may be created either in equal instalments for the remaining period or higher amount if profits permit.

 

(c) Companies may distribute dividends out of general reserve in certain years if residual profits after transfer to DRR are inadequate to distribute reasonable dividends.”

 

3. The Committee also notes the definition of a debenture as per Section 2(13) of the Companies Act, 1956, as reproduced by the querist in para 2 of the query.

4.   Based on the above, the Committee is of the view that all companies raising resources through the issue of debentures have to create a Debentures Redemption Reserve. For the purpose of the Companies Act, 1956, debenture includes bonds also. Therefore, the said Guidelines would apply to bonds.

5. The Committee notes that Debentures Redemption Reserve may be created either in equal instalments for the remaining period or higher amount if profits permit. Thus, creation of Debentures Redemption Reserve is mandatory, the only option is that it may be created either in equal instalments for the remaining period or higher amounts if profits permit.

6. The Committee is further of the view that even if 100% shares are held by the Govt., the amount has to be transferred to Debentures Redemption Reserve before declaring dividends. If the profits in certain years are not sufficient, after transferring to Debentures Redemption Reserve, then dividends may be distributed out of general reserve, subject to fulfillment of the requirements of law.

7.   Based on the above, the Committee is of the following opinion for issues raised at para 4 of the query:

(i)    Yes. Creation of Debentures Redemption Reserve is applicable to bonds also.

 

(ii)   Yes. It is mandatory to create Debentures Redemption Reserve either in equal instalments for the remaining period or higher amounts if profits permit.

 

(iii)  Even if demanded by Govt., the amount has to be transferred to Debentures Redemption Reserve before declaration of dividends.

 

(iv)  Since transfer to Debentures Redemption Reserve is mandatory, out of the profits, first the amount should be transferred to the DRR and then to R & D reserve.

_________________________________________________________________