Debenture Redemption Reserve is required to be created by the company on which of the following category of debentures?

Non- Convertible Debentures

The correct answer is option 3- Non- Convertible Debentures.

SEBI Guidelines for redemption of debentures:

(i) The creation of Debenture Redemption Reserve (i.e., DRR) is obligatory only for non-convertible debentures and non-convertible portion of partly convertible debentures.

(ii) An unlisted company shall create DRR equivalent to at least 10% of the nominal (face) value of outstanding debentures.

*A company may not use funds allocated to the DRR for any purpose other than the redemption of debentures.

1. Convertible part of Partly Convertible Debentures (PCDs): When a debenture is partly convertible, it means only a portion of it can be converted into equity shares of the company at a future date. Since part of the debenture is convertible, DRR is not required for this portion. However, DRR is still required for the non-convertible portion of PCDs.

2. Fully Convertible Debentures (FCDs): In the case of fully convertible debentures, the entire debenture is convertible into equity shares. As these are fully convertible, DRR is not required because the conversion into equity shares serves as a mechanism for redemption.

3. Non-Convertible Debentures (NCDs): Non-convertible debentures are those that cannot be converted into equity shares. These debentures are redeemed at maturity, and thus, DRR is required to be created by the company out of its profits, as per the regulations in India and some other jurisdictions. This reserve is created to ensure that the company has sufficient funds available for the redemption of these debentures when they mature.