5 December 2023

Supreme Court's Clarifies The Treatment Of Compulsorily Convertible Debentures – Equity Or Debt?

Phoenix Legal


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In a recent landmark judgment, the Supreme Court of India, in the matter of M/s. IFCI Limited vs. Sutanu Sinha & Ors., dealt with a vital issue, i.e., whether an instrument such as a CCD should be treated as debt or equity …
India Finance and Banking
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In a recent landmark judgment, the Supreme Court of India (Court), in the matter of M/s. IFCI Limited vs. Sutanu Sinha & Ors.1, dealt with a vital issue, i.e., whether an instrument such as a Compulsorily Convertible Debenture (CCD) should be treated as debt or equity for the purpose of the Insolvency and Bankruptcy Code, 2016 (IBC).

Significantly, the Court refused to read into or add to the agreements entered into by the parties and noted that the complexities of commercial documents depended on the nature of business. While the CCDs were held to be equity, the Court decoded the nature of commercial bargains struck between parties and held the CCDs as equity, while observing that commercial agreements between parties are nowadays vetted by experts and parties understand their obligations and benefits.

Facts of the case

A concession agreement (Concession Agreement) was executed between IVRCL Chengapalli Tollways Ltd. (ICTL/ Corporate Debtor) and the National Highways Authority of India (NHAI) for a highway project. ICTL was incorporated as a wholly owned subsidiary of IVRCL Ltd (IVRCL/ Sponsor) for the project.

To finance the project, as a part of the debt component, ICTL received a term loan from a consortium of lenders and IVRCL was to provide the remaining funds through equity infusion, a part of which was to be obtained through CCDs, which amount was invested by IFCI Ltd., the Appellant (IFCI/Appellant).

IFCI subscribed to the CCDs under a Debenture Subscription Agreement (DSA). The DSA provided for IVRCL (and not the Corporate Debtor) to make coupon payments, provide security and also a 'put option', allowing IFCI to sell the CCDs to a third party in the event of default. Subsequently, the project ran into financial difficulties, due to which IFCI was not paid. ICTL though had offered a one-time settlement which eventually was revoked and the corporate guarantee given by IVRCL was invoked by IFCI. Subsequently, both IFCI and State Bank of India initiated the Corporate Insolvency Resolution Process (CIRP), under the IBC.

Rejection of IFCI's claim by the RP

IFCI filed a claim in the CIRP of ICTL assuming the nature of a financial debt. The Resolution Professional (RP) on 9 August 2022 rejected the amount claimed mainly on the grounds that:

  • CCDs were to be treated as equity under all project documents, especially the Concession Agreement which supersedes all agreements;
  • there was no recategorization of the CCDs from equity to debt or no approval sought from NHAI for such conversion, as contemplated under the Concession Agreement;
  • all payment obligations were of IVRCL and not ICTL;
  • the notes to the balance sheet of ICTL also record the repayment obligations of IVRCL; and
  • the CCDs were mandatorily convertible in December 2017 and corporate actions were pending.Top of Form

NCLT2 and NCLAT upholds RP's decision

IFCI filed an application before NCLT Hyderabad only in November 2022, to challenge the rejection of its claim by the RP, but did not succeed. NCLT inter alia, relied upon the judgment in the matter of Narendra Kumar Maheshwari v Union of India & Ors.3 (Narendra Kumar judgment) which holds that "A Compulsorily Convertible Debenture does not postulate any repayment of the principle.......Any instrument which is compulsorily convertible into shares is regarded as an "equity" and not a loan or debt" . To arrive at its decision, the NCLT also relied upon the Reserve Bank of India Master Directions on Foreign Investment in India4 (RBI Master Directions) which state that debentures which are fully, compulsorily and mandatorily convertible are treated as equity instruments, to draw a parallel to the present scenario. It observed that occurrence of an event of default cannot change the nature of an instrument from equity to debt, unless the contract provides so, or it has been agreed between the parties subsequently. The NCLT also distinguished the earlier judgment in the matter of SGM Webtech Private Limited v. Boulevard Projects Private Limited5 (SGM Webtech), by observing that in SGM Webtech, it was held that if at the time of winding up or admission under IBC, if the debentures are not matured and not convertible, for the period of redemption is not complete, they shall be treated as debentures and it will remain as debt. However, the conditions of SGM Webtech are not applicable in the present case since the CCDs got matured much before admission into CIRP.

On appeal, the NCLAT6 upheld the NCLT's decision, and added that the obligation to repay the interest was that of IVRCL, and that the CCDs in the present case do not fall under the definition of 'financial debt', under Section 5(8) of the IBC.

Arguments before the Supreme Court

IFCI on challenging the NCLAT's decision before the Court, argued that:

  • IFCI has been left remediless, the conversion to equity became impossible due to the insolvency of ICTL and now IFCI is neither treated as shareholder nor as a financial creditor;
  • the Narendra Kumar judgment can be distinguished on the basis that, that judgment was in the context of a public interest litigation, and in the present case the real objective was to treat the CCDs as debt; and
  • the classification CCDs as debt or equity should be determined based on the status of the maturity of the CCDs and the position of the investor at the inaugural time. In the present case, the CCDs were never formally converted to equity even after the date of maturity.

The Respondents submitted that:

  • the concept of convertible instruments including CCDs falls within the definition of equity under the Concession Agreement, while debt means "liability or obligation in respect of a claim which is due from any person...7";
  • ICTL does not have any liability or obligation qua IFCI because IFCI is actually an equity participant and does not have any debt to be repaid;
  • prior written approval of lenders was required before ICTL could issue any debentures or raise any loans, which approval was never sought. This approval was required since the lenders wanted to ensure that their pool is not expanded which had the potential of casting a doubt on the full recoverability of their debt;
  • the financing plan itself envisaged CCDs as part of the equity portion of the funding; and
  • if it was a simpliciter debenture, it would have fallen in the category of financial debt, along with bonds etc. However, the present case concerns CCDs with liability for coupon payments, buy back and security being the Sponsor's, failing which the CCDs were to automatically convert to equity.


The Court observed that upon a reading of the DSA and the Concessionaire Agreement, it can be concluded that IFCI was provided security under the DSA, but the obligations were always of the Sponsor, i.e., IVRCL, and not the Corporate Debtor's. Unless the debt is proven to be of ICTL, IFCI cannot seek a recovery of the amount, assuming the position of a creditor of ICTL. The Court also observed that IFCI has not disputed that the put option available to it was not exercised.

Placing reliance on Nabha Private Limited Vs. Punjab State Power Corporation Limited8, the Court emphasized that commercial courts should not endeavour to look into implied terms of a contract. The effect of which is that, the contract means as it reads, and it is not advisable for a court to add or supplement to it, or infer terms beyond what is explicitly stated.

The Court upheld the NCLAT's order stating that the issue has been correctly crystallised as to whether CCDs could be treated as a debt instead of an equity instrument, and that the decision that treating the CCDs as debt would be tantamount to breach of the common loan agreement and specially the Concession Agreement, which has an overriding effect.

The Court specifically held that the investment was clearly in the nature of debentures which were compulsorily convertible into equity, there was no provision stating that these CCDs would partake the character of financial debt on the happening of a particular event.

While dismissing the appeal, the Court clarified that its jurisdiction under Section 62 is confined to a question of law, akin to a second appeal. The law under IBC does not envisage unlimited tiers of scrutiny and every tier of scrutiny has its own parameters The present appeal, it concluded, did not raise any such question of law, and the lower courts' findings were in accordance with established legal principles.


The judgment in the present matter serves as an important reminder not only on the parameters of a second appeal under the IBC, but also on interpretation of commercial contracts and the boundaries within which, a court ought to interpret a commercial contract, which is assumed to always have been entered into by parties after negotiations and legal advice. The parties know their respective bargain and therefore it would be detrimental to commerce in general, if courts implied terms into commercial contracts. The Judgment importantly also observed that the nature of an instrument being debt or equity, would depend on facts and circumstances of each case, and hybrid instruments, such as CCDs, are to be read in context of a particular matter.

Phoenix Legal represented the RP in the proceedings before the NCLT, NCLAT and the Supreme Court of India.


1. M/s. IFCI Limited vs. Sutanu Sinha & Ors. (Civil Appeal No.4929/2023)

2. IA No. 1465 of 2022 in CP (IB) No. 28/07/HDB/2022

3. 2 (1990) Suppl. SCC 440

4. Updated up to 17 March 2022, RBI/FED/2017-18, FED Master Direction No. 11/2017-18/60

5. IB 967/ PB/ 2018, NCLT, Principal Bench

6. Company Appeal (AT) (CH) (INS.) No. 108/2023

7. Section 3(11) of IBC

8. Nabha Private Limited Vs. Punjab State Power Corporation Limited [(2018) 11 SCC 508]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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