Compulsorily Convertible Debentures are equity, not debt: Supreme Court

In a landmark decision, the Supreme Court has ruled that Compulsorily Convertible Debentures (CCDs) are to be treated as equity instruments and not as debt. This ruling has significant implications for investors who have invested in CCDs, as it means that they will not be able to recover their investments in the event of the insolvency of the issuing company.

The case in question involved an appellant who had invested in Compulsorily Convertible Debentures (CCDs) issued by IVRCL Chengapalli Tollways Ltd (ICTL). ICTL was a subsidiary of IVRCL, which had secured a project to construct a highway in India. The appellant had invested in CCDs as part of the financing for the project.

ICTL subsequently ran into financial difficulties and was unable to repay its debts. The appellant filed a claim for its investment in the CCDs, but the claim was rejected by the resolution professional appointed to oversee the insolvency proceedings.

The appellant challenged the rejection of its claim before the National Company Law Appellate Tribunal (NCLAT), which upheld the resolution professional’s decision. The appellant then appealed to the Supreme Court.

In its decision, the Supreme Court noted that the CCDs were compulsorily convertible into equity shares of ICTL. This means that the appellant was not a creditor of ICTL, but rather an equity holder. As an equity holder, the appellant’s investment was at risk and could be lost if the company failed.

The Court also noted that the Compulsorily Convertible Debentures were treated as equity for the purposes of the Concession Agreement with the National Highways Authority of India (NHAI). This means that the NHAI had approved the treatment of the CCDs as equity and would not have allowed them to be treated as debt.

Key takeaways of the Supreme Court ruling

• Compulsorily Convertible Debentures are to be treated as equity instruments and not as debt.
• Investors in CCDs will not be able to recover their investments in the event of the insolvency of the issuing company.
• Investors should carefully consider whether CCDs are the right investment for them.

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