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  • Pratyanik Chakraborty

What Art Thou, CCD: Debt Equity or Still a Confusion?

[Pratyanik is a student at Indian Institute of Management Rohtak.]

The Insolvency and Bankruptcy Code 2016 (IBC) is gradually developing and gaining maturity through a series of judgements over the seven years since its establishment- one judgment at a time. The evolving IBC regime had not yet clearly and substantially addressed the issue of the legal standing of hybrid securities within its regulatory framework. The utilization of hybrid securities has significantly multiplied with the advancement of commercial procedures.

In the recent case of IFCI Limited v. Sutanu Sinha and Others [Civil Appeal Number 4929/2023] (Sutanu Sinha), the Supreme Court of India dealt with the position of one such hybrid security, namely compulsorily convertible debenture (CCD). This article has analyzed the recent verdict rendered by the Supreme Court of India in Sutanu Sinha, along with two other judgements delivered by the National Companies Law Tribunal. Our investigation suggests that these two orders were the sole authoritative sources, excluding Sutanu Sinha. Based on extensive investigation, we have found that these three authorities from the adjudicating bodies share a striking similarity in their approach to determining the nature of CCDs under the water-fall mechanism. Additionally, we have presented a compelling argument against the validity of that method from a legal standpoint, emphasizing the necessity for the courts to reexamine all three current authorities.

Reading through Sutanu Sinha

IFCI Limited (Appellant) acquired CCDs through a debenture subscription agreement (DSA). The DSA was offered to the sponsor company of the corporate debtor and not the corporate debtor (IVRCL Chengapalli Tollways Limited (CD)) to facilitate coupon payments and offer security. It included a 'put option' that granted the Appellant the ability to sell the CCDs to a third party in case of default. It has to be noted that the conversion date of the CCDs into equity was December 2017. However, the official distribution of shares did not occur after the specified date. Further, during the corporate insolvency resolution process (CIRP) of the CD, the CCDs held by the Appellant were considered as equity and not debt. This was challenged before the National Companies Law Tribunal (NCLT) and the National Companies Law Appellate Tribunal (NCLAT), post which the Appellant approached the apex court.

The Supreme Court of India highlighted that the true nature of this instrument must be determined from the instrument of security transfer, the DSA. Further, the CD was required to adhere to a specific debt-to-equity ratio as per a contractual obligation. Thus, the CD treated the CCDs as equity to match the debt-to-equity ratio. Since the balance sheet of the CD considers the CCDs as equity, and the instrument of transfer (DSA) mandates that after the maturity period, the debt will be compulsorily converted into equity, the court ruled the CCDs in the nature of equity and not debt.

As already stated, in the Indian jurisprudence regarding CCDs, two more precedents exist apart from the Sutanu Sinha. We will explore these two precedents hereinbelow.

Previous Precedents

The first precedent in this regard is the SGM Webtech Private Limited v. Boulevard Projects Private Limited [MANU/NC/2636/2020] (SGM Webtech), the principal bench of the NCLT faced an application from a CCD-holder to be included in the roster of financial creditors. The applicant CCD holder’s hybrid securities were yet to mature on the date of the initiation of the CIRP. The bench relied on the generally accepted interpretation of a debenture, which refers to a financial obligation that must be repaid within a particular time frame. Additionally, the fact that the corporate debtor had recognised this debenture as a liability in its financial records led to the classification of the CCDs as debt.

In the second precedent, Agritrade Power Holding Mauritius Limited v. Ashish Arjunkumar Rathi [MANU/NC/2096/2023] (Ashish Rathi) - a similar application as SGM Webtech was made to the NCLT. However, in this case, this request was made by the applicant who held CCDs with a maturity date specified as the last date allowed by law for converting the investor's CCDs in the event of the company's winding up, liquidation, dissolution, or any ‘analogous event’. The tribunal treated the CCDs as debts before the commencement of CIRP, treating it as an ‘analogous event’. The tribunal also observed that the SGM Webtech facts closely resembled the present CCD issuing company, as both had CCDs listed as liabilities on their balance sheets.

This tribunal referencing the SGM Webstech order is quite interesting because it allows us to draw similarities between the two orders of SGM Webtech and Ashish Rathi. In the next section, we will discuss this similarity and how the Sutanu Sinha judgment from the apex court is also trying to take a similar decision-making route.

Holy Trinity says “Balance Sheet”

An examination of SGM Webtech, Ashish Rathi, and Sutanu Sinha reveals that the adjudicating authorities, whether it be the Supreme Court or the company tribunals, largely prioritise the facts and circumstances of the cases rather than the nomenclature given to the instruments in question. Therefore, it is difficult to establish that any of these ratios may be considered as a stare decisis. Nevertheless, the author of this piece contends that the holy trinity of these three authorities fundamentally has a singular common argument.

Ashish Rathi highlights that the CCDs in question, similar to those in SGM Webtech, are classified as liabilities in the balance sheet. Consequently, the securities are considered as debt rather than equity. As previously stated, in Sutanu Sinha, the Supreme Court also examined how the CD's financial statement accounted for the contested CCDs. This treatment of the securities in the balance sheet- serves as a shared connection among all three authorities and is a test of assessing the nature of security in the case of these hybrid securities. Is this the answer we sought to determine the securities' characteristics based on their nomenclature?

Persistence of a Problem!

The issue of conducting the 'treatment in balance sheet' test, if we may refer to it as a test, is that it fundamentally challenges numerous well-established authorities, specifically if any hybrid securities are classified as debt according to this 'treatment in balance sheet' test. According to Section 5(8) of the IBC, 'financial debt' is a debt that includes interest and is provided in consideration for the value of money over time. This concept encompasses several funding sources, such as bonds, notes, debentures, and loan stock. Section 3(11) defines debt as a responsibility or obligation related to a 'claim', defined in Section 3(6) as a right to payment, regardless of any disputes. In contrast to regular or optionally convertible debentures or any other debenture, a CCD does not include debt repayment. Instead, it is solely converted into shares after the maturity period. In addition, the Supreme Court of India, in the case of  Innoventive Industries v. ICICI Bank [(2018) 1 SCC 407], has clarified that the main condition for a financial creditor to start CIRP under Section 7 is the existence of a debt due by a corporate debtor. A financial creditor is defined by the existence of a 'debt', which represents a certain amount that must be repaid. In the case of Anuj Jain v. Axis Bank [(2020) 8 SCC 401], the Supreme Court of India determined that a 'financial debt' must fulfil the requirement of being provided in exchange for the value of money over time. It is crucial for all transactions, including debentures, listed under sub-clauses (a) to (i) of Section 5(8). It was also established that a debt encompasses a responsibility or duty related to a demand, encompassing financial and operational debt. The decisive factor should be the lack of obligation or liability in the case of a CCD, even though it falls under the same category as other debt instruments. Nevertheless, there are further issues concerning the current authorities regarding the treatment of CCDs under IBC. The apex court in Sutanu Sinha did not address a specific question regarding the put option vested with the CCD holders.

The NCLT in Union Bank of India v. Era Infra [(2018) SCC OnLine NCLT 9130] and the Bombay High Court in Vandana Global Limited v. IL&FS Financial Services Limited  [(2018) SCC OnLine Bom 337] have determined that put options associated with debt obligations, when executed alongside loan agreements and granting lenders the right to enforce their rights in the event of default, are considered guarantees under the Indian Contract Act 1872. Consequently, these put options are classified as financial debt. It is crucial to emphasise that these decisions were specifically made about put options on a loan obligation rather than on a CCD or an equity instrument. Thus, it was necessary to have a proper clarification regarding CCDs, which the Sutanu Sinha judgment lacks.


Hybrid securities, by virtue of having the best of both the worlds of debt and equity, are a highly desirable instrument. Thus, there is a need for a judgment that can be taken as a stare decisis, unlike the existing three authorities as discussed. The author of this piece respectfully concludes that the judgment in Sutanu Sinha is far from perfect, as are SGM Webtech and Ashish Rathi. The courts need to revisit these authorities and fill the existing gaps.


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