What is Debenture Redemption Reserve?
Debenture Redemption Reserve (DRR) refers to as a reserve representing retention out of profits for redeeming the debentures.
In other words, debenture redemption reserve is a reserve which is made out of the organisation’s profits for the purpose of redemption of the debentures. Section 117C of Companies Act 1956 makes it mandatory for the company to transfer a specific amount from the profits to Debenture Redemption Reserve before the redemption of debentures.
However, the act has not specified the limit of amount to be transferred to DRR. Securities Exchange Board of India guides the amount to be kept aside. The government of India regulates capital market through the office of Securities and Exchange Board of India. SEBI’s function is to regulate the capital market and make it fair, transparent besides protecting the interest of the investors.
A company shall create a Debenture Redemption Reserve (DRR) of an amount equivalent to 25% of amount of debentures before the redemption of debentures. DRR appears on the liabilities side of Balance Sheet under the head General Reserve.
According to SEBI guidelines:
A company is require to create a DRR of an amount equivalent to 50% of the amount of debenture issue. All this to be done before the redemption of debentures. The provision is applicable in case of non-convertible debentures only. But non-convertible which are partly convertible also part of this provision.
Exceptions to the creation of DRR
- Infrastructure companies involves in the business of developing, maintaining and operating infrastructure are exception to the creation of DRR.
- A company issuing debentures with maturity period of not more than 18 months.
Journal Entry for Debenture Redemption Reserve
|Profit and Loss Appropriation A/c Dr.|
|To Debenture Redemption Reserve|
|To Debenture Holder’s A/c|
|To Bank A/c|
|To General Reserve|