Why This Favouritism?
IDBI had sought exemption from the creation of a DRR on the grounds of its being a development financial institution. That is strange logic. IDBIs job is to lend for the creation of infrastructure and for setting up new projects. These have long gestation periods, and cash flows have to be well planned to tailor them to maturing liabilities. Manufacturing companies, on the other hand, have regular cash flows as part of a very well-defined working capital cycle. Under these circumstances, it would seem that being a development financial institution would mean that it would be all the more necessary to create a sinking fund.
But is the creation of a debenture redemption reserve really necessary? Yes, if we assume that companies need to be monitored very closely. The argument is that in the absence of a debenture redemption reserve, corporates would tend to treat its reserves as free reserves. This may lead to a declaration of a higher dividend than warranted, or even the capitalisation of reserves by way of a bonus issue.
The contra argument is that the creation of a DRR results in the company not being able to declare dividends, and hence limits its access to the capital markets. This is especially true of infrastructure projects. What is important is not the setting aside of a sum for redemption of debt, but for structuring debt in such a manner that the investor is provided a measure of comfort. This is already happening, in lenders taking a first charge on project revenues instead of the largely hypothetical charge on assets. And it can be argued that blocking funds in a DRR, on which the return could be lower than the amount being paid on the bonds, is not good for the company. In the final analysis, it is the efficiency with which the funds are used which matters, and not accounting measures such as a DRR. Rating a bond issue and allowing a company to tap funds on the basis of its rating and its reputation would be a market solution to the problem, rather than the accounting solution imposed by the DRR. But there is no reason why IDBI should get preferential treatment in this regard.