NBFCs, HFCs, listed firms no longer need debenture reserve to raise funds

The ministry of corporate affairs (MCA) has removed the requirement for debenture redemption reserves (DDRs) for listed companies, housing finance companies(HFCs) and non-banking financial companies(NBFCs) to reduce the cost of capital, a demand which was on the wish lists of India Inc. to the government. The move is also aimed at deepening the bond market. 

 At present, these companies have to set up a reserve to the tune of 25 per cent of the value of their outstanding debentures for the protection of investors in case of default. 

The MCA also brought down the requirement of such reserves for unlisted companies to 10 per cent from the existing 25 per cent of the value of outstanding debentures. 

"This would help reduce the cost of capital raised by companies through issue of debentures and is expected to significantly deepen the bond market," the ministry said in a statement here. 

Hitherto, listed companies had to create DRRs for both public issues and private placements of debentures, while NBFCs & HFCs had to create DRRs only when they opted for a public issue.

On the other hand, banking companies and all India financial institutions are already exempted from creating DRRs.

The MCA’s move is aimed at creating a level playing field for NBFCs, HFCs and listed companies.

Rohit Raghavan, partner, L&L Partners, said the move will likely help improve liquidity, bring about a level playing field between bonds and loans, and deepen the bond market in the country. "There is no clarity on whether exempt issuers will still be required to maintain the unencumbered reserve of 15 per cent of the value of bonds maturing in a given year," he said. 

Earlier, the Securities and Exchange Board of India (Sebi) had recommended reviewing the DRR norms.