Compulsorily convertible debentures (“CCDs”), as the type suggests, are debentures that are compulsorily convertible into equity shares. CCDs first became prominent in the foreign direct investment (“FDI”) context in 2007 when Indian foreign exchange laws expressly recognized them as the only type of debentures that Indian companies could issue to raise FDI. The reason to disallow other types of debentures for FDI purposes was to curb debenture issuances to foreign investors in the guise of equity. Since the foreign exchange laws had established a FDI regime for equity instruments and a separate external commercial borrowing (“ECB”) regime for debt instruments, it was felt that Indian companies were bypassing the ECB route by issuing hybrid debt instruments under the FDI route. Thus, CCDs have been regarded as equity instruments for FDI purposes.

In November 2023, the Supreme Court of India (“Supreme Court”) delivered its judgment in IFCI Limited v. Sutanu Sinha (“IFCI Limited”) that dealt with the question whether CCDs are to be treated as ‘debt’ or ‘equity’ in a different context. This note analyzes the Supreme Court judgment and the ‘repayment of principal’ test that courts have consistently applied to determine whether convertible debt instruments are regarded as ‘debt’ or ‘equity’.


IFCI Limited arose in the context of a corporate insolvency resolution process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016. IFCI Limited (“IFCI”), an Indian company, made an investment in IVRCL Chengapalli Tollways Limited (“ICTL”) for constructing a highway by subscribing to CCDs of ICTL. IFCI’s investment was a domestic one that was not covered by the Indian foreign exchange laws.

Subsequently, the highway project ran into financial difficulties and CIRP proceedings were initiated against ICTL. By this time, the CCDs had matured and were automatically convertible into equity shares of ICTL. Even then, IFCI claimed that its investment in the form of CCDs constituted debt and hence, it should be treated as a ‘financial creditor’ in the CIRP. IFCI argued that the resolution professional treated IFCI neither as a ‘shareholder’, nor a ‘financial creditor’, thereby leaving it without a remedy.

Both the National Company Law Tribunal and the National Company Law Appellate Tribunal (“NCLAT”) disagreed with IFCI. In its judgment, the NCLAT reasoned that since CCDs do not contemplate repayment of the principal amount, they must be regarded as equity and not debt. To reach this holding, the NCLAT relied on the ‘repayment of principal’ test laid down by the Supreme Court in Narendra Kumar Maheshwari v. Union of India (“Narendra Kumar Maheshwari”).

The NCLAT also relied on the Reserve Bank of India’s master direction on foreign investment in India to rule against IFCI. The master direction expressly states that “debentures which are fully, compulsorily and mandatorily convertible are treated as equity instruments.”

IFCI filed an appeal against the NCLAT’s judgment before the Supreme Court. The Supreme Court upheld the NCLAT’s ruling and, in doing so, affirmed the ‘repayment of principal’ test laid down in Narendra Kumar Maheshwari.


In Narendra Kumar Maheshwari, the Supreme Court came up with a test to determine whether a convertible debenture would be regarded as ‘debt’ or ‘equity’. The test is simple: Do the terms of the convertible debenture postulate repayment of the borrowed principal amount? If the answer is yes, then the convertible debenture is treated as a debt instrument, even though such repayment may be optional and may not occur upon maturity. Conversely, if the convertible debenture’s terms do not contemplate repayment of the principal amount (i.e., conversion into equity shares upon maturity is mandatory), it is to be regarded as an equity instrument.

Applying this test, the Supreme Court observed that CCDs must be converted into equity shares upon maturity and therefore, the possibility of repayment of the principal amount does not arise. Consequently, the Supreme Court held that CCDs would be treated as equity and not debt.

The ‘repayment of principal’ test laid down in Narendra Kumar Maheshwari also finds mention in the Supreme Court’s judgment in Sahara India Real Estate Corporation Limited v. Securities and Exchange Board of India. The Supreme Court noted the findings of the Securities and Exchange Board of India (“SEBI”) on the question of whether optionally fully convertible debentures (“OCDs”) at issue in that case fell within the definition of ‘securities’ under the Indian securities laws. While analyzing this issue, the SEBI had considered the issue of whether OCDs would be regarded as ‘debt’ orequity’. Relying on the test in Narendra Kumar Maheshwari, it held that unlike CCDs, an OCD holder has an option to choose whether it wants its principal amount repaid or converted into equity. Since the option contemplates repayment of the principal amount upon maturity, the SEBI concluded that OCDs would be treated as debt and not equity.

A recent penalty order of the Registrar of Companies, Mumbai (“RoC”) in the matter of Wurknet Private Limited (“Wurknet”) dated November 17, 2023 sheds light on the question of whether the procedure relating to debt or equity is to be followed for issuance of convertible notes (“CNs”) under the Companies Act, 2013 (“Companies Act”).

In this case, Wurknet, a startup company, raised funds by issuing CNs. It issued the CNs by following the procedure prescribed under Section 62(1)(c) of the Companies Act that deals with preferential issue of shares. The RoC examined the issuance and concluded that Wurknet had issued the CNs under the wrong provision of law. The RoC held that Wurknet should have followed the procedure prescribed under Section 62(3) of the Companies Act. This provision allows a company to convert its debentures into shares of the company pursuant to an option attached to such debentures without following the procedure under Section 62 of the Companies Act, subject to a special resolution having been passed by the company’s shareholders at the time of the debenture issuance.

The RoC’s ruling that CN issuances must comply with the procedure prescribed under Section 62(3) of the Companies Act implies that the RoC treats CNs as debt instruments until (and if) they convert into equity shares.


The RoC’s rationale is consistent with the ‘repayment of principal’ test. After all, CNs and OCDs share similar characteristics – both instruments, by definition, contemplate repayment of the principal amount at the option of the holder. Hence, CNs more closely resemble OCDs than CCDs. However, it is also true that CNs are allowed to be issued by ‘startup’ companies to foreign investors under the FDI policy. To that extent, it would be fair to say that CNs exist in the FDI context as an exception to the general rule that disallows optionally convertible debt instruments to be issued by Indian companies for FDI purposes. Lastly, it is important to mention that although the Supreme Court judgment was delivered in the CIRP context, the treatment of CCDs from a tax or accounting perspective will need to be separately considered.

Authors: Viral Mehta (Partner), Lakshmi Pradeep (Partner), Rajat Maloo (Associate), Advaita Kapoor (Associate)

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