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Fab Fathi
Shining Star International School

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Q.NO.4.ANS: The following are the main points of SEBI s guidelines for creation of Debenture Redemption Reserve (DRR). 1. Every company that issues debentures with a maturity of more than 18 months shall create DRR. 2. An amount equal to 50% of debenture issued shall be transferred to DRR before starting redemption of debentures. 3. Creation of DRR is applicable only for Non-Convertible Debentures and for nonconvertible part of Partly Convertible Debentures. 4. Any withdrawal from DRR is allowed only after 10% of debentures are redeemed. Thus, as per the SEBI s guidelines, 50% of the debentures issued should be redeemed out of the profits that are transferred to DRR and the remaining 50% of the debentures issued can be redeemed either out of profits or out of capital. Hence, no company can redeem all the debentures issued purely out of the capital. As per the SEBI s guidelines the following companies are exempted from the creation of DRR. 1. Infrastructure companies (i.e. those companies that are engaged in the business of developing, maintaining and operating infrastructure facilities) 2. A Company that issues debentures with a maturity up to 18 months Q, NO.1.ANS: Redemption of Debentures Out of Capital When debentures are redeemed out of capital and no profits are utilised for redemption, then such redemption is termed as redemption out of capital. In such a situation, no profits are transferred to the Debenture Redemption Reserve (DRR). As per the guideline laid down by Securities and Exchange Board of India (SEBI) and the Section 117C of Company Act of 1956, the creation of DRR is mandatory (DRR). Therefore, it is not possible to redeem debentures purely out of capital, as it reduces the value of assets. The following companies are exempted from the creation of DRR. 1. Infrastructure companies (i.e. those companies that are engaged in the business of developing, maintaining and operating infrastructure facilities) 2. A Company that issues debentures with a maturity up to 18 months Redemption of Debenture Out of Profits when debentures are redeemed out of profit then no capital is utilised for redemption. Before redeeming the debentures profits are transferred to DRR from Profit and Loss Appropriation Account. The creation of DRR is mandatory as per the guidelines laid down by Securities and Exchange Board of India (SEBI). SEBI mandates transferring amount equal to 50% of debentures issued to DRR before redeeming debentures. In this method, as profits are transferred to the DRR Account, thereby reducing the total amount of profits, therefore this method is termed as Redemption of Debentures out of Profits. In this method, first of all, the required profits are transferred from Statement of Profit and Loss to the DRR Account. The working of which is shown in the Notes to Accounts of Reserves and Surplus (as prescribed in Revised Schedule VI). The final balance (after considering DRR) is shown as the subhead Reserves and Surplus under the main head of Shareholders Funds on the Equity and Liabilities side of the Company s Balance Sheet. Lastly, when all the debentures are redeemed, then DRR account

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