Redemption of Debentures: Meaning, Sources and Rules regarding Redemption (original) (raw)
Last Updated : 13 Jun, 2026
Redemption of debentures refers to the repayment of debentures to the debenture holders, thereby discharging the company’s liability arising from them. Normally, debentures are redeemed at the end of their specified term. However, a company may also redeem them before maturity if it is permitted by its Articles of Association and the terms of issue. Such early redemption can be done either by paying the debentures in instalments or by purchasing them in the open market.
Sources of Finance for the Redemption of Debentures
Following are the sources for the redemption of Debentures:
- Redemption from the proceeds of fresh issue of shares and debentures
- Redemption of debentures out of Capital
- Redemption of debentures out of Profits
**1. Redemption from the proceeds of fresh issue of shares and debentures: A company may raise fresh capital by issuing new equity shares, preference shares, or debentures. The proceeds from these new issues are then used to redeem the old debentures. This method does not disturb the financial position of the company as funds are replaced rather than withdrawn from existing resources.
**2. Redemption of Debentures out of Capital: Under this method, no profits are set aside for redemption, and debentures are repaid directly out of capital. However, as per Section 71 of the Companies Act, 2013 and SEBI guidelines, companies are generally required to create a Debenture Redemption Reserve (DRR), so redemption purely out of capital is not practically followed in most cases.
**3. Redemption of Debentures out of Profits: Under this method, a part of the company’s profits is transferred to a Debenture Redemption Reserve (DRR) from the Profit and Loss Appropriation Account. This reduces the profits available for dividend distribution. The accumulated DRR is later used to repay the debentures, ensuring funds are reserved in advance for redemption.
**Amount of Debenture Redemption Reserve [DRR]:
According to Rule 18(7)(b) of the Companies (Share Capital and Debentures) Rules, 2014, the following companies are required to create DRR:
| Minimum Debenture Redemption Reserve [DRR] - 0% | Minimum Debenture Redemption Reserve [DRR] 25% |
|---|---|
| All India Financial Institutions regulated by the Reserve Bank of India (RBI) | Other Companies (listed or unlisted) |
| Banking Companies | Non-Banking Financial Companies (NBFC) and other financial institutions covered by Section 2(72) of the Companies Act, 2013 for publicly issued debentures |
| Non-Banking Financial Companies (NBFC) and other financial institutions covered under Section 2(72) of the Companies Act, 2013 for publicly issued debentures | -- |
Rules regarding Debenture Redemption Reserve
The following points should be kept in mind while creating Debenture Redemption Reserve:
- DRR should be created with 25% of the nominal value of debentures if it is mentioned that redemption is out of capital.
- DRR should be created with 100% of the nominal value of debentures if it is mentioned that redemption is out of profits.
- 25% of the nominal value of debentures is to be transferred to the DRR account if nothing is mentioned about the source of redemption.
- A total of 100% of the nominal value of debentures is to be transferred to the DRR account if, in any particular question, DRR already exists with more than 25% of the nominal value of debentures.
**Illustration:
Rockstar Ltd., (listed on Stock Exchange) has outstanding 10,00,000, 9% Debentures of 100 each due for redemption on 30th October 2019.
**Solution: The company have to create DRR for a equal to 25% sum value of debentures due for redemptions, i.e., 2,50,000 before redemption.
Minimum Debenture Redemption Reserve Investments[Rule 18(7)(c)]
According to Rule 18(7)(c), every company that is required to create a Debenture Redemption Reserve (DRR) must also invest or deposit, on or before 30th April each year, an amount equal to 15% of the debentures maturing during the year ending 31st March of the following year. This amount must be invested in specified securities or deposited in approved accounts. The purpose of this requirement is to ensure that sufficient funds are available for the timely redemption of debentures when they become due.
Permissible deposits or investments in Specified Securities are as follows:
- _In deposits with any Scheduled Bank, free from any charge.
- _In unencumbered securities of the central government or any state government
- _In unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882
- _In unencumbered bonds issued by any other company which is notified under sub-clause (f) of Section 20 of the Indian Trusts Act, 1882.
**Note: The amount deposited or invested can be used only for the purpose of redemption of debentures due for redemption during the year ending on 31st March of the next year.
**For Example, Virat Ltd., (listed on Stock Exchange) has outstanding 9% Debentures of 100 each due for redemption on 30th October, 2018.
In the given example the company have to create DRR for a sum equal to 25% of value of debentures due for redemptions, i.e., 2,50,000 before redemption. Further, the company is also required to deposit or invest 1,50,000 (15% of the amount of debenture due for redemption during the next year which is 10,00,000) in specified securities on or before 30th April 2018.