Compulsory Convertible Debentures: The "Chameleon" Problem

INTRODUCTION

Compulsory convertible debenture (“CCDs”) occupies a unique and increasingly contentious space in corporate law and allied fields of practice. These instruments are structured to start as debentures as was fundamentally contemplated under in the language of Section 71¹ of the Companies Act 2013 (“Companies Act”) which treats Debentures as ‘debt’. However, due to the hybrid nature, often resembling debt in form, but are mandatorily convertible into equity shares at a future date. Their appeal lies in their “chameleon-like” nature since they offer the fixed-income security of a debt instrument in the short term while guaranteeing an equity stake in the long term. However, this hybridity creates a significant legal vacuum. Unlike optionally convertible debentures, where the investors can choose to demand repayment, CCDs must convert into equity. This mandatory conversion feature forces a clash between “form” (the instrument is a debenture) and “substance” (when the