Debenture Redemption Reserve (DRR) is a mandatory reserve created by companies to ensure the timely repayment of debenture holders upon maturity. It serves as a financial safeguard that protects investors by guaranteeing that sufficient funds are available for redemption when the debentures become due.

A debenture is a type of debt instrument used by companies to raise funds from the public, promising to pay back the principal along with interest. Since debentures are borrowed funds, companies are legally obligated to redeem them after a fixed period. To maintain investor confidence and financial discipline, regulatory authorities like the Ministry of Corporate Affairs (MCA) mandate companies to create a DRR out of their profits.

Purpose of DRR:

• Investor Protection: Ensures that funds are available for repayment, minimizing default risk.
• Financial Discipline: Encourages companies to set aside profits systematically for future obligations.
• Creditworthiness: Enhances the companyís credibility in the debt market, making future fundraising easier.

Regulatory Requirements: According to the Companies Act, 2013, every company issuing debentures must create a DRR from its profits before declaring dividends. However, the requirement has been relaxed for certain categoriesólike banking companies, non-banking financial companies (NBFCs), and public financial institutionsóto encourage capital market participation. Typically, companies must transfer a fixed percentage (for example, 10% to 25%) of the value of outstanding debentures to the DRR.

Example: If a company issues ?100 crore worth of debentures, it may need to create a DRR of ?10 crore to ?25 crore depending on applicable regulations. This amount is kept aside until the debentures are fully redeemed.

In summary, the Debenture Redemption Reserve (DRR) plays a vital role in safeguarding investor interests and ensuring financial accountability. By maintaining a DRR, companies demonstrate fiscal prudence, reduce default risks, and build trust in the debt market.