Compulsorily Convertible Debentures: Whether Debt Or Equity?

Compulsorily Convertible Debentures (CCDs), a hybrid instrument, has gained prominence in the last two decades. However, its classification as equity or debt has been the subject of discussions, mainly due to conflicting perspectives under different laws. This initial divergence surfaced from the framework of guidelines under the Foreign Exchange Management Act, 1999 (FEMA), which deemed CCDs as equity. However, in the realm of tax jurisprudence, CCDs have been treated as debt until the point of conversion. This conflict arises due to the hybrid nature of CCDs having the essence of both debentures and equity.

This issue recently resurfaced in IFCI v. Sutanu¹ (Judgment), wherein the discussion of the nature of CCDs was undertaken under the Insolvency and Bankruptcy Code, 2016 (Code) before the Hon'ble Supreme Court of India (Apex Court). Considering that different laws have treated the nature of CCDs differently, it becomes interesting to have a discussion to