Debenture Redemption Reserve

In feudal times, it was not uncommon among nobles for one family to hold the child of another family as a “guest”, i.e. “hostage,” whose patriarch might be in their debt until such time as the debt was paid off. If you haven't seen the analogous gruesome scenes in Game of Thrones, well, you oughta.

While such a practice may have fallen into disuse long ago, the notion of compelling a lender to make a contribution to a set aside lock box to ensure against default is alive and well. Companies and institutions that issue debentures and bonds often have a sinking fund or other designated account that takes a percentage of profits on a regular basis off the table for the purposes of repayment. Whether the borrower likes it or not.

In India, the designated account is called a Debenture Redemption Reserve. Indian law requires 25% of the amount of debentures issued needs to be set aside before maturity. Additionally, each year, 15% must be set aside for debentures on track to mature by the end of first quarter the following year.