INTRODUCTION
Compulsorily convertible debentures (“CCDs”), often classified as “deferred equity”, are issued by companies as debentures which are compulsorily convertible into equity upon occurrence of agreed trigger events or post maturity. As a hybrid security, CCDs offer returns by way of interest, while also facilitating ownership in the issuing entity at a later date. Despite falling within the ambit of debentures, CCDs are not redeemable for cash and have been held to not constitute a ‘debenture’ in its classic sense.[1]
This feature of CCDs has also led the Reserve Bank of India to treat CCDs as equity instruments under the foreign direct investments (FDI) guidelines.[2] However, contentions raised in and judgements delivered pursuant to insolvency proceedings under Insolvency and Bankruptcy Code, 2016 (“Code”) have stirred up debate on treatment of CCDs and accompanying rights in the event of the issuer company’s insolvency.
CCD AS FINANCIAL DEBT
The meaning and scope of “financial Debt” under the Code[3] lies at the core of this debate, which definition illustrates various instruments and transactions which are included in the meaning of “financial debt” and includes the following:
“a debt along with interest, if any, which is disbursed against the consideration for the time value of money”; and
“any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument”.
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[1] Narendra Kumar Maheshwari v. Union of India, 1990 Supp SCC 440.
[2] Rule 2 (k), Foreign Exchange Management (Non Debt Instruments) Rules, 2019.
[3]Section 5(8) of the Insolvency and Bankruptcy Code, 2016.
[4] Section 5(8)(c) of the Insolvency and Bankruptcy Code, 2016.
[5] Section 5(7) of the Insolvency and Bankruptcy Code, 2016; Srei Multiple Asset Investment Trust v. IDBI Bank Ltd. & Ors., MANU/NL/0066/2022.
[6] Agritrade Power Holding Mauritius Limited and Ors. v. Ashish Arjunkumar Rathi, Interim RP of SKS Power Generation (Chattisgarh) Limited, MANU/NC/2096/2023.
[7] IFCI Limited v. Sutanu Sinha & Ors, MANU/NL/0540/2023.
[8] Agritrade Power Holding Mauritius Limited and Ors. v. Ashish Arjunkumar Rathi, Interim RP of SKS Power Generation (Chattisgarh) Limited, MANU/NC/2096/2023.
[9] SGM Webtech Pvt. Ltd. v. Boulevard Projects Pvt. Ltd., MANU/NC/2636/2020.
[10] Union Bank of India v. Era Infra Engineering, CA No. 997(PB)/2018 in CP No. IB-190(PB)/2017.
[11] Vandana Global Limited v. IL&FS Financial Services Limited, 2018 SCC OnLine Bom 337.
[12] Section 5(8)(i), Insolvency and Bankruptcy Code, 2016.
[13] 2018 SCC OnLine NCLT 11437.
[14] Pushpa Shah v. I.L. & F.S. Financial Services Ltd., 2019 SCC OnLine NCLAT 1543 [15] Section 5(8) (h) of the Insolvency and Bankruptcy Code, 2016.
[16] Section 5(8)(g) of the Insolvency and Bankruptcy Code, 2016.
[17] Jignesh Shah v. Union of India, (2019) 10 SCC 750.
[18] 2021 SCC OnLine NCLT 3103.
