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Defining Debenture Redemption Reserve (DRR) and Debenture Redemption Investment (DRI)

VSAT 2022

Redemption of Debentures Meaning

Last updated date: 30th Jan 2023
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Companies and businesses traditionally utilised debentures to raise capital via public debt offerings. The debenture amount is guaranteed to be paid back to the lender at the end of the term, but the borrowers retain their lack of security. In India, a company or firm's collateral is used to obtain a loan. However, they are still not protected in the United States.


Meaning of Redemption of Debentures


Meaning of Redemption of Debentures


Redemption of debentures means that debentures may be redeemed or paid back in full once their term has ended by repaying any outstanding obligations or loans owed to the debenture holder or even the lender who provided the loan.


Redemption of Debentures Journal Entries

Redemption of debentures includes a series of stipulations about the repayment of the debt or obligations, which were agreed upon by both parties. When a corporation's debentures mature, the company must repay the money borrowed from the holders of those debentures.


After the funds are repaid, the liability on the debenture account is discharged. Redemption of debentures journal entries:

1. Amount paid on redemption:

Debenture account Dr.

To bank account

2. For transferring properties

Profit and loss appreciation account Dr.

To Debenture Redemption Reserve account


Methods of Redemption of Debentures


State the Types of Redemption of Debentures Methods


State the Types of Redemption of Debentures Methods


The amount owed to the person who owns a debenture when it comes due is called "redemption." The redemption involves giving back both the principal amount and the interest that was due on it. Companies could buy back the debentures at face value plus a profit. The company borrows money through debentures. This is a risk for the company. When this obligation comes due, it is paid off by a redemption process. Debentures can be redeemed in several ways. Each method of redemption of debentures has its way of keeping track of money. These ways of doing things can be put into the following groups:

  • Payment in one lump sum when the bond matures: - Under this method of redemption, the agreed-upon value of the debenture is compensated to the debenture holder all at once.

  • After maturity, instalment payments: - This is a different way debenture can be redeemed. The parties agree to save the debentures in instalments, which must be paid as agreed upon when the debentures were issued.

  • Redeeming the debenture by buying it on the market - You can also purchase debentures on the open market and use that to pay off your debt. This gives the option of redeeming the points at a lower price.

  • Converting debentures into fresh debentures or equity shares- Most debentures are redeemed by changing them into equity shares, preference shares, or even new debentures.


Sources of Redemption:

The following are the sources of redemption of debentures:

  • Companies Capital

  • Earned Profit

  • Change to Shares or Debenture

  • Earnings from the sale of new shares or bonds

  • Assets for Sale.


DRR and DRI


DRR and DRI


DRR and DRI


A debenture redemption reserve is a rule that says any company, firm, or business in the country which issues debentures must open a service for redeeming the debentures to display that they are making an effort to get their money back.


According to the Indian Companies Act of 1956, all businesses that issue debentures must set up a debenture redemption reserve well before a particular debenture matures. This Act says that companies must represent at least 25% of the face value of the debentures they have issued. Companies don't have to set aside money for the debenture redemption reserve immediately after issuing a debenture. After the debentures are paid off, the extra DRR has to be moved to the company's Capital Reserve.


If a company that gives debentures sets aside money for redeeming them, this is called a debenture redemption investment. Most of the time, the amount invested is at least 15% of the face value of the debentures that will be redeemed throughout the financial year. For DRR to be created, a company needs to invest the money in specific securities.


Conclusion

Debentures are a big part of how corporations get the money they need. Compared to other ways to earn money from the market, like preferred shares, bonus issues, equity shares, and rights issues, debentures are one of the most important ways to get money. Debentures may be less likely to default if provisions like DRR are made. The DRR ensures the company has enough money to pay the debenture holders and meet its other obligations. Debenture Redemption Reserve decreases the buyer's investment risk.

FAQs on Defining Debenture Redemption Reserve (DRR) and Debenture Redemption Investment (DRI)

1. What happens to the extra DRR after the debentures have been paid off?

Debentures are a way for companies to get money by taking on long-term debt. After debentures are paid off, the extra DRR has to be moved to the firm’s Capital Reserve. Aside from the ways listed above, the business can also pay off the debentures by taking out an insurance policy or setting up a sinking fund to meet the redemption obligation. The primary benefit of issuing debentures is the lower cost of capital since the cost of issuing stock is greater than the cost of debt.

2. How much money should be set aside as a redemption reserve?

Once debentures are reclaimed, the debentures liability is discharged. The Debenture Redemption Reserve shall be equal to 10% of the outstanding debt securities on or before April 30 of each year for debentures issued by the corporation. The sum transferred to the Debenture Redemption Reserve (DRR) should coincide with the amount invested. A portion of the company's annual income must be set aside each year to cover the interest due on the debentures, which is also included as a cost of doing business.

3. Define specific considerations while making DRR. 

The service for redeeming debentures only works for debentures approved after the Indian Companies Act of 1956 was changed in 2000. The DRR money may only be used to purchase back debentures. Each of the following four groups of companies is excluded from DRR requirements:

  • Reserve Bank of India - All India Financial Institutions (AIFIs) (RBI).

  • Banking companies that offer debentures to public and private investors. 

  • Companies that provide housing loans are registered with the National Housing Bank. 

  • Other financial institutions.

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