State Bank of India desires to redeem 5,000, 10% debentures of ₹ 1,000 each at par out of available sufficient divisible profits. In this case, how much amount should be transferred to debentures redemption reserve A/c as per requirement under Section 71(4) of Indian Companies Act, read with rule 18(7) of a banking company ?

Question

Accepted Answer

The correct option is 4:
The correct answer is Zero because of a specific statutory exemption provided to banking companies under the Indian Companies Act, 2013, read with the relevant rules. The Debenture Redemption Reserve (DRR) is a mechanism designed to protect the interests of debenture holders by requiring companies to set aside profits before redemption, ensuring funds are available. However, Rule 18(7)(b) of the Companies (Share Capital and Debentures) Rules, 2014, clearly exempts **banking companies** and certain other financial institutions regulated by the Reserve Bank of India (RBI) from the requirement of creating a DRR. Since the State Bank of India is a major banking company, it falls squarely under this exemption. Consequently, regardless of the debenture amount or the source of redemption (divisible profits), a banking company is not legally obligated to transfer any amount to the Debenture Redemption Reserve Account.

The incorrect option is 1:
The total value of debentures to be redeemed is 5,000 debentures multiplied by ₹ 1,000, which equals ₹ 50,00,000. Transferring the entire ₹ 50,00,000 to DRR would imply a 100% DRR requirement. Although a 100% DRR was historically required for redemption out of profits for unlisted companies before amendments, this option ignores the most critical piece of information: the nature of the company. Because the State Bank of India is a banking company, it is fully exempt from the DRR requirement. The DRR is an accounting reserve from profits, and the full redemption value should not be confused with the mandatory DRR transfer amount.

The incorrect option is 2:
The amount ₹ 7,50,000 represents 15% of the total face value of the debentures (₹ 50,00,000 multiplied by 15%). The 15% figure is associated with the requirement for **Debenture Redemption Investment (DRI)**, not the Debenture Redemption Reserve (DRR). Companies are generally required to invest or deposit at least 15% of the face value of debentures maturing in the current year. This is a liquidity and investment requirement, which is separate from the transfer of profits to the DRR account. Furthermore, even this DRI requirement has specific exemptions for banking companies, making this option incorrect on both conceptual and legal grounds.

The incorrect option is 3:
The amount ₹ 12,50,000 represents 25% of the total face value of the debentures (₹ 50,00,000 multiplied by 25%). This 25% is the standard minimum required percentage for the Debenture Redemption Reserve (DRR) for certain categories of companies, such as listed non-banking financial companies (NBFCs). However, State Bank of India is a **banking company**, which is a distinct statutory category from NBFCs under the relevant rules. As established by the exemption under Rule 18(7)(b), a banking company is granted a complete exemption from the requirement to create *any* Debenture Redemption Reserve.