Question

Consider the following statements.

1. Non-convertible debentures (NCDs) are debt instruments that companies issue to investors to raise money for their capital requirements.

2. Recently Government given concession in creating Debenture Redemption Reserve (DRR) for their outstanding bonds,for all listed companies, non-banking financial companies (NBFC) and housing finance companies (HFCs).

Which of the above statements is/are correct?

1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 or 2

Answer 1

Correct Answer - Option 3 : Both 1 and 2

The correct answer is Both 1 and 2.

• One of the recent measures taken by the government to boost the fear-ridden bond market was the decision to do away with the requirement for all listed companies, non-banking financial companies (NBFC) and housing finance companies (HFCs) to create a Debenture Redemption Reserve (DRR) for their outstanding bonds. Hence, statement 2 is correct.
• Non-convertible debentures (NCDs) are debt instruments that companies issue to investors to raise money for their capital requirements. Hence, statement 1 is correct.
• NCDs regularly pay interest at a fixed rate for a fixed tenure till maturity. However, there have been incidents where companies raising funds through NCDs at high rates of interest have failed to pay their dues. In order to protect the interests of retail investors in such cases, the Companies Act mandated that companies must maintain a redemption reserve.
• As per the Companies (Share Capital and Debentures) Rules 2014, all listed companies, NBFCs, HFCs and unlisted companies were to create a DRR with 25 per cent of the value of outstanding debentures from their profits.
• A DRR ensures that a company sets aside a portion of its profits toward repayment of long-term NCDs out of its current profits.
• The DRR requirement for unlisted companies (excluding unlisted NBFCs and HFCs) is still on, but at a lower rate of 10 per cent (against the earlier 25 per cent).