1. ABSTRACT
The “Insolvency and Bankruptcy Code, 2016” (IBC), has emerged as a radical change in field of law in India’s business entities restructuring. In the origin of a sequence they are issued as debt instruments but must later be converted into equity shares. In the ongoing circumstances the CCDs are considered ambiguous instruments playing a dual character that leads to a key question: Should CCDs be considered as financial debt under Section 5(8) of the IBC? If so, holders should be allowed to join the “Corporate Insolvency Resolution Process” (CIRP) as financial creditors rather than debtors.
This paper serves an extensive analysis of the rules about CCDs under the IBC and other laws. These include the “Companies Act, 2013”, the “Foreign Exchange Management Act” (FEMA), and SEBI rules. It reviews key court decisions from NCLT, NCLAT, and the Supreme Court of India highlighting the historical development of Court’s perspective on CCDs. The manuscript argues that CCDs are debt until they convert to equity according to the rules prescribed under Insolvency and Bankruptcy Code 2016. This evidently indicates they should be viewed as financial debt under the IBC. While analysing the hybrid nature of CCDs, the piece also highlights policy issues and legal gaps about hybrid instruments in insolvency cases and revised suggestions are given to address these gaps.
2. KEYWORDS
Compulsorily Convertible Debentures (CCDs), Financial Debt, “Insolvency and Bankruptcy Code 2016”, “Corporate Insolvency Resolution Process” (CIRP), Hybrid Instruments, Financial Creditor, NCLT, NCLAT, Section 5(8) IBC, Debt-Equity Classification, Committee of Creditors (CoC)
3. INTRODUCTION
[1]“The Insolvency and Bankruptcy Code, 2016”, was implemented to amalgamate and improvise laws relating to the reorganisation and insolvency of corporate persons in a time-sensitive manner. This marked a significant shift by replacing the previously disintegrated creditor-resolution mechanisms under the Companies Act, 1956, and the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) in accordance with IBC framework in the classification of creditors into financial and operational creditors, a distinction that carries various procedural and consequential implications during the CIRP. Hybrid instruments such as Compulsorily Convertible Debentures straddle the boundaries of debt and equity while comparing it with bonds, term loans, or non-convertible debentures, CCDs must convert into equity shares at a set date or upon a contingency creating class ambiguity under the IBC. The main question that is still embedded in our minds is what is the procedure when a corporate debtor initiates the insolvency process during the temporary period between issuance and conversion into debt. So to prevent ambiguity clarifying this transition is crucial to assessing how CCDs should be treated within the IBC framework.
The hybrid nature of CCDs under the IBC is creating confusion in our day to day operation about whether they should be treated as financial debt or equity investment. This distinction is essential because it determines whether the financial creditors can initiate CIRP, form part of the Committee of Creditors, and be eligible for priority in liquidation under Section 53. Thus, understanding the transitional nature of CCDs is the golden way to resolve the long-standing confusion regarding their classification, rights, duties and powers.
4. RESEARCH METHODOLOGY
It embraces a didactic and analytical research methodology. The main legal sources are the “Insolvency and Bankruptcy Code, 2016”; [2]the “Companies Act, 2013”; “the Foreign Exchange Management Act, 1999”; the “Foreign Exchange Management (Non-Debt Instruments) Rules, 2019”; and key SEBI framework about debentures and convertible securities. Secondary sources included in the manuscripts are circulars, guidelines, and explanatory notes from IBBI, RBI, SEBI, and MCA. Judicial decisions are taken into consideration to form significant and appropriate decisions. The paper analyses decisions of the NCLT primarily at two benches, the NCLAT, and the [3]Supreme Court of India (Court of Record).
5. REVIEW OF LITERATURE
5.1 Nature of Debt and Compulsorily Convertible Debentures under IBC.
Debt is a liability or an obligation which has a negative connotation as perceived by the society. Nobody wants to be crushed under debts, do they?. According to Section 5(8) of the IBC, a financial debt means a debt, inclusive or without interest, given for the time value of money. This includes borrowing with interest, raising funds through bonds or debentures, and lease liabilities. The inclusion of debentures means that CCD can be treated as financial debt. Compulsorily Convertible Debentures (CCDs) are company-issued corporate debt that must convert into equity shares at a set time or when certain conditions are met. CCDs must convert into equity at a fixed or variable ratio, with no option to reclaim the equity. Until conversion, CCDs carry the essential features of debt: they are issued at a face value, may carry a coupon or interest rate, and create an enforceable obligation against the issuing company. The dual character possessed by the instrument initiates debates and demands clarity over classification of its status before being treated as equity. This is to be understood thoroughly to ensure consistent legal treatment of CCDs.
5.2 The BLRC and Insolvency Law Committee (ILC) Reports.
The [4]”Bankruptcy Law Reforms Committee (BLRC)”, constituted in 2014 in ambit of the Ministry of Finance and chaired by Dr. T.K. Vishwanathan, submitted its report in November 2015 with the objective of reducing the time period (180-270 days), maximizing recovery, improving credit availability, and providing assurance. It replaced fragmented laws with a single integrated code, leading to the formation of the “Insolvency and Bankruptcy Code, 2016 (IBC)”d. The committee specifically aimed to shift control from debtor to financial creditor on the foundation of the ongoing CoC system. The BLRC report does not explicitly include CCDs, although it lays down principles that help evaluate whether CCDs can be treated as financial debt. If CCDs carry interest, coupon, assured returns, they are treated as financial debts; courts today treat interest-bearing CCDs as financial debt according to the central test – Time value of money, Section 5(8) of IBC. A CCD that functions economically like a loan even after conversion to equity is considered financial debt due to its hybrid nature. The Creditor in Control model of BLRC emphasizes that financial creditors should control insolvency resolution; hence, if CCD holders are classified as Financial Debtors, they enter CoC and have the power to influence the resolution. The 3 core tests provided by BLRC are currently used by courts to decide CCD classification. [5]The ILC reports evidently do not discuss CCDs, but they clarify that financial debt can affect hybrid instruments such as CCDs. It supported a wide and flexible interpretation of financial debt by including innovative financial instruments, such as debentures, which support the inclusion of CCD as financial debt. Furthermore, it created a conflict by recommending the incorporation of Homebuyers as financial creditors, thereby showing a conspicuous intent to expand the definition of financial creditors and include non-traditional instruments, while simultaneously strengthening the position of CCD holders as financial creditors. The ILC identifies and acknowledges the confusion around hybrid instruments and the need for clarity to reduce litigation. Both the BLRC and ILC reports, read together, suggest a legislative intent to adopt an economically purposive interpretation of financial debt. The absence of explicit guidance on CCDs in these foundational documents has, however, left a vacuum that the judiciary has been compelled to fill through case-by-case adjudication because of the underlying pressure faced by the courts. This results in fallouts due to the urgency of a legislative amendment that directly questions hybrid instruments and provides a logical or easy to understand framework for their treatment under the IBC.
5.3 Key Judicial Decisions
The landmark judgement of SGM [6]Webtech Pvt. Ltd. v. Boulevard Projects Pvt. Ltd, 2019 by NCLT established that Compulsorily Convertible Debentures are to be treated as financial debt rather than equity under the IBC if the Corporate Insolvency Resolution Process (CIRP) commences before maturity, and that CCD holders are financial creditors until conversion. The reasoning behind the judgment is ~
· CCDs carry assured returns/ interests
· CCDs are reflected as borrowings in the financial records.
· It satisfied the time value of money test/requirement.
Hence, CCDs are equivalent to financial debt when structured as interest-bearing instruments.
In [7]L&T Finance Ltd. v. Tikona Infinet Pvt. Ltd. 2025, NCLT accepted Section 7 of IBC against Tikona for unpaid CCD coupons of 116 crore rupees. The dispute was over coupon rights, such as interest on CCDs, which led to insolvency proceedings. This shows CCD holders acting as financial creditors. CCDs with coupon duties are financial debt because of the time value of money. In a similar case, the NCLAT ruled that CCDs constitute financial debt. In [8]IREDA v. Waaree Energies Ltd., the court held that CCDs are monetary debt under Section 5(8) if they reflect the time value of money and act like borrowing. Hence, CCDs with “interest” or “coupons”, “commercial borrowing”, and “debt qualities” comes within purview of financial debts even if they are later converted to equity.
6. DETAILED ANALYSIS AND METHOD
6.1 Section 5(8) Scanning : Parsing the Definition of Financial Debt under IBC Code 2016.
Section 5(8) of the IBC explains the classification between what is a financial debt and who is a financial creditor under Section 5(7). This is important to understand because financial creditors initiate the process of CIRP under Section 7, lead decisions in the Committee of Creditors, and are given priority in liquidation under Section 53. Section 5(8) focuses on debt, disbursement technique, time value of money, and clauses A-I. The courts use interpretative tests, helping to distinguish between financial and operational creditors while assessing debt. Some of these tests are:
· Time Value of Money Test: Evaluates the presence or relevance of interest or economic return.
· Commercial Effect of Borrowing Test: Determines whether the transaction amounts to borrowing.
· Disbursal Test: Discerns whether the money was actually advanced or not.
· Intention of Parties Test: The conclusion is derived from agreements.
· Substance Over Form Test: It emphasizes economic reality over legal label.
When CCDs qualify as financial debt, they are structured as borrowing, reflect the time value of money, and carry interest/coupon. In the case of [9]Swiss Ribbons Pvt. Ltd. v. Union of India, it armoured the importance of classification by distinguishing safe and secured lending (financial creditors) and supply-based claims (operational creditors), and comparably in [10]IFCI Ltd. v. Sutanu Sinha, the Hon’ble Court held that CCDs can be equity if structured purposely in reference to if contractual terms are decisive. A robust skeleton for classifying CCDs and niche repositioning from nominal label to economic functioning is successful through these test interpretations. The application of these tests ensures that CCD holders who have effectively acted as lenders are not unjustly denied the rights and remedies available to financial creditors under the Code which fosters tribunals to accomplish nuanced outcomes.
6.2 The Equity Argument and Its Limitations
Compulsorily Convertible Debentures (CCDs) are considered bifunctional instruments that from inception are treated as debt but indispensably convert into equity after maturity or on occurrence of an unforeseeable or unpredictable event. The classification of CCDs under IBC, 2016, has sparked significant debate, making it difficult to identify whether they should be treated as financial debt or equity. An important feature of CCDs is that they confer no obligation to repay principal in cash and mandate conversion into shares, meaning the instrument is not “debt”. Under FEMA, CCDs are treated as equity instruments because they prevent disguised debt inflows while simultaneously ensuring compliance with FDI norms. Equity investors bear business risk as they do not have guaranteed returns. Similarly, CCD holders receive shares and participate in losses/profits.
resembling risk capital. The ultimate nature after conversion, which is compulsory, is equity. Despite CCDs being treated as equity instruments, they create legal and practical problems under IBC. In general, CCDs carry interest or coupon payments that provide assured returns, like debt. Treating them as equity will defy economic reality and the time value of money. Transactions involving the commercial effect of borrowing might be treated as equity, leading to misclassification. If CCDs are treated as equity, they have no right to initiate CIRP, zero participation in CoC, and will have the lowest priority under Section 53. This is problematic because CCD investors often act like lenders, resulting in unfair exclusion.
The inherent feature of CCDs that forces it to be treated as an equity is the absence of repayment obligation and their ultimate conversion into shares; however, this fails to prove reliable for the economic realities of CCDs. Under IBC, the principles of time value of money and commercial effect of borrowing lead to inconsistent and unjust outcomes. Therefore, substance over form is essential.
7. SUGGESTIONS AND RECOMMENDATIONS
7.1 Statutory Recognition of Hybrid Instruments
Lately, the most effective and enduring solution to the problem addressing uncertainty surrounding CCDs under the IBC is a targeted legislative amendment. The Insolvency and Bankruptcy Code, 2016, does not exclusively address hybrid instruments such as CCDs, leading to inconsistent and vague judicial interpretation and litigation issues. To limit this, a specific provision in Section 5(8) should be introduced to recognize hybrid instruments and provide a statutory definition of CCDs under IBC. Through this uniform treatment and operational clarity is guaranteed.
7.2 Harmonisation Across Regulatory Frameworks
To effectively address the distinction between the IBC, the [11]Companies Act, 2013, and the [12]FEMA (Non-Debt Instruments) Rules, 2019, in their treatment of CCDs, regulatory compliance and coordinated action is requisite. Hence, this is the proposed three-tier classification by IBBI or Legislature ~
- Tier 1: Debt Indicators ~ To evaluate the presence of interest/coupon payments.
- Tier 2: Equity Indicators ~ Requires mandatory conversion and absence of repayment.
- Tier 3: Commercial effect of borrowing ~ To determine whether the instrument has a commercial effect of borrowing.
7.3 IBBI Guidance Note on Hybrid Instruments
Witnessing massive amount of pending legislative amendment requires the IBBI to issue a comprehensive guidance note or circular addressing the treatment of hybrid instruments, including CCDs, in CIRP proceedings. The guideline should exclusively mandate temporal tests as a default mechanism, provide directions for resolution professionals or liquidators to calculate the financial debt claim of CCD holders, take into consideration the procedural ambiguity and pass orders concerning admissions under Section 7 and rightful representation of CCD holders or financial creditors in the committee. Hence to know the ropes and determine the black and white of CCDs, these measures could accelerate proficiency by addressing inconsistencies within constructive time limits.
7.4 Mandatory Disclosure in CIRP Proceedings
The information memorandum under CIRP proceedings are prepared by Resolution Professionals and the framework mandates them to disclose this particular clause because it is deemed necessary. Proceedings initiated by corporate debtors are required to be mandatorily disclose the outstanding CCDs. Particular clauses such as the conversion date, conversion ratio, interest levied, followed by the outstanding principal should be promptly passed on to the resolution applicants so they can fulfil their obligations stated within their obligation plans avoiding discrepancies. The Committee of Creditors play an important role in accomplishing their core competency in accordance to decision-making regarding treatment of CCDs as a crucial part of the resolution plan approval process.
7.5 Training and Awareness for Insolvency Practitioners.
Why training and awareness of securities handling, procedures and structure is considered important? That is because the IBBI, through its educational and training programmes for Insolvency Professionals serve dedicated modules on hybrid financial instruments, including CCDs, covering their commercial characteristics, legal treatment across different regulatory frameworks, and specific considerations for CIRP proceedings as insolvency professionals are the foundational blocks of IBC, 2016, fostering process as Interim Resolution Professionals, Resolution Professionals, Liquidators, and Bankruptcy trustees. Although, through increased awareness and understanding among Insolvency Professionals it can lead to more consistent, well-reasoned decisions at the operational level of CIRP to foster efficiency and productivity. Also it will foster efficient handling of complex financial instruments, ensure accurate creditor classification in terms of position and power, maintain procedural efficiency in a timely manner, and uphold professional standards.
8. CONCLUSION
[13]The discussion over Compulsorily Convertible Debentures under the Insolvency and Bankruptcy Code, 2016, showcases layered and consequential challenges in contemporary Indian insolvency jurisprudence. The hybrid nature of CCDs, debt initially which eventually leads to a mandatory conversion to equity, places them at the intersection of corporate finance and insolvency law, corroborating interpretive ambiguity that courts and tribunals are still resolving, pushing their limits to meet expected results while still dealing with pending cases and deprived resources. Ultimately delaying justice.. This paper has argued that the better view, consistent with the text, purpose, and legislative history of Section 5(8) of the IBC, is to treat CCDs as financial debt during the pre-conversion period. The two non-negotiable elements of financial debt under Section 5(8), namely disbursement and consideration for the time value of money, are clearly convinced in the case of CCDs. The inherent features such as conversion, does not explicitly change the fundamental character of the instrument during the phase prior to conversion as a debenture. The instrument creates a debt obligation enforceable against the corporate debtor; that obligation must be recognised and protected under the IBC.
The judicial disparities exhibits larger structural deformity, particularly in NCLAT decisions. The confusion regarding the treatment of Compulsorily Convertible Debentures prevails due to absence of well- established legislative framework supervising hybrid securities. Additionally, acute shortage of trained securities personnel creates a mountain out of a molehill. Hence, establishing a reliable structure for insolvency becomes a crucial step for the government and the finance ministry to be precise. The aim should be to strike a balance between creditor protection, promoting true economic transactions and maintaining the alignment between insolvency law and synchronous financial practices.
NAME ~ KHUSHI BHATNAGAR
COLLEGE ~ UNIVERSITY OF MUMBAI LAW ACADEMY (BBA LLB)
[1] Insolvency and Bankruptcy Code, 2016, No. 31, Acts of Parliament, 2016 (India).
[2] The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).
[3] Supreme Court of India, https://www.sci.gov.in/
[4] Ministry of Finance, Bankruptcy Law Reforms Committee (BLRC) Report, Vol. I (Nov. 2015) (India).
[5] Ministry of Corporate Affairs, Insolvency Law Committee Report (Mar. 2018) (India).
[6] SGM Webtech Pvt. Ltd. v. Boulevard Projects Pvt. Ltd., (2019) ibclaw.in 731 NCLT.
[7] L&T Finance Ltd. v. Tikona Infinet Pvt. Ltd., C.P. (IB) 694/2024 (NCLT Mumbai May 1, 2025).
[8] ^1 Indian Renewable Energy Dev. Agency Ltd. v. Waaree Energies Ltd., (2024) ibclaw.in 756 NCLAT.
[9] Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 S.C.C. 17 (India).
[10] M/s. IFCI Ltd. v. Sutanu Sinha, (2023) 10 SCC 145 (India).
[11] Companies Act, 2013, No. 18 of 2013, India Code (2013)
[12] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, G.S.R. 777(E), Gazette of India, Extraordinary, Part II, sec. 3(ii) (Oct. 17, 2019) (India).
[13] ibid