Types of Debentures

This article has been written by Harshit Kumar. This article discusses debentures and the main focus is the convertible debentures, its features, objectives, types, process of issuance, advantages and disadvantages and risks involved. This article will also discuss the major landmark judgements and regulatory Acts that are controlling the market dynamics. This article will discuss two main types of convertible debentures in detail, which are always in conflict because of their nature. Overall this article will provide a thorough overview of convertible debentures and will help in understanding its complexities in depth and clarity. 

Table of Contents


Whenever a company requires to increase its capital, it uses some financial tools to do so, and one of the tools is the issuing of shares. However, the capital raised by issuing shares is at times not enough to pay for the long term goals of that company. Therefore, most of the companies go for raising long-term capital which can either be offered to the general public or issued through private settings. Debentures are issued when a company requires funds without lowering its equity position. This is equivalent to borrowing a loan which is to be repaid gradually, with a fixed interest rate. The fund raised through Debenture is also known as ‘Long-term debt’. But the question is, what are debentures? 


Debentures are one of the tools used by businesses to raise long-term funds, to fulfil their long-term goals. The word ‘debenture’ comes from the Latin word ‘debere’, which means ‘to borrow’. It is a document carrying a company’s common seal that acknowledges a debt. This document consists of an agreement of principal repayment either after a certain amount of time which is predetermined or at regular intervals or at the discretion of the company. There is a clause in the agreement, named “Interest Rate Clause” or “Interest Payment Clause”, stating the payment of a fixed rate interest, which is due on a specified date or half yearly or annually.

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The Companies Act, 2013 defines ‘debenture’ under Section 2(30), as:

“Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.”

It is basically a document or a certificate duly signed by an authorised officer/s of a company recognising the money borrowed and ensuring repayment at a fixed rate of interest, putting security on the company’s assets to ensure the fulfilment of its contractual obligations on time and debenture holders are the one who holds the debenture. They are also known as the creditors as they are the lenders to the company. They do not participate in the decision making of the company, however, the company is obliged to pay the interest to the debenture holders, whether or not it makes a profit. 

This article will be focusing on the convertible debentures and in detail discuss the objectives, types and process of issuing them along with some recent cases.

Convertible debentures

What are convertible debentures

Convertible debentures are those types of debentures which can be converted into equity shares or preference shares, at the discretion of the debenture-holders or the company. These conversions are done at predetermined exchange rates, after a specific period of time. 

The Companies Act, 2013, under Section 71 explains the issuance of the debenture with an option to convert it into shares, either wholly or partially, at the time of redemption. It further explains that the issuance of such convertible debentures will require the company to pass a special resolution, whether wholly or partially. 

A convertible debenture is a form of a long term debt that can be converted to shares after a specified period of time. Considering that there is no substantial security linked to the debt, it is often considered an unsecured bond or loan. These are long term debt security that pays interest returns to the bond holders.   

A convertible debenture yields regular interest income by the means of coupon payments and upon maturity it provides repayment of the principal. 

Features of convertible debentures 

The following are the features of the convertible debentures:

  1. The debentures can be converted into either a specified or unspecified number of equity shares when the predetermined period ends. The conversion price depends on various factors like market value, and anticipated rise in the equity share price.

Conversion price: The price or ratio at which the exchange of convertible debentures, for equity shares, takes place, therefore also known as conversion ratio. 

  1. The convertible debentures are either fully convertible or partially convertible. When it is fully convertible, then with the expiration of the specified period, the entire face value gets converted into equity shares.

Face value: The face value is the principal amount of the debenture that the investors are paid back after the end of the debenture’s tenure. This amount is borrowed by the issuer, from the investors and this amount is specified on the debenture certificate. In the case of convertible debenture, the face value helps in extracting the conversion ratio.  This helps in calculating the number of shares each investor will get after the debenture is converted into equity shares.

When it is partially convertible, then after the specified term expires only the convertible part is converted into the equity, and the non-convertible part is redeemed after the expiration of the specified period.

Redeemable debentures: The redeemable debentures are those types of debentures which are payable after the expiry of the specified duration. These can either be paid fully or in instalments, throughout the existence of the company.

  1. Whether fully convertible or partially convertible, the convertible debentures can be converted into equity shares, either after the expiration of the specified term, or terms in one or more than one stages. 
  2. The debenture interest may be paid as per the market force. The companies are permitted to pay any interest they consider as reasonable. Even, where no interest on the debentures is payable, it can be issued as zero interest debentures. 
  3. The convertible debentures are listed on the stock exchange. But, in India, they are not actively traded in the stock exchange. The reputed companies stand as exceptions.       

Objective of issuing convertible debentures 

The convertible debentures provide an option to the debenture holders to convert their investment into an equity share after a certain period, therefore, the number of investors using this tool increased because of its unique advantages, which provides an adequate balance between the profit and risk. There are certain objectives for which the investors are choosing for this tool, these are discussed as follows:

  1. The chances of higher returns: The first objective of investing in convertible debentures is the potential to get high returns. Therefore, the investors will continue earning a fixed income while participating in the equity growth of the company.  This means that with the increase in the company’s stock value, the value of the convertible debenture will also increase.  This investment can provide a substantial return to the investors, in comparison to the traditional fixed income investment.
  2. Downside protection: This is another objective of choosing for convertible debenture. When there is a decline in the stock price of the company, the value of the convertible debenture will not fall in line with it. The reason is that the fixed-income element of the convertible debenture functions as the buffer for the market fluctuations. This is recognised as downside protection and this provides the investors a more reliable investment option as this reduces the risk related to the equity investment.
  3. An option of diversification: The convertible debentures provide the investors an option to diversify their investment portfolio. Investing in both equity and debt, helps the investors to diversify their risks among the different types of assets. This provides a more reliable and steady long-term investment strategy and helps lower the overall risk of an investment portfolio.
  4. Benefits of Tax: Another objective of convertible debentures is that it can provide tax benefits to the investors. The interest earned on the debentures is taxable as income, however, until the equity is sold by the investors, there is no tax levied when the debenture is converted into equity. Therefore, unlike investing completely in the equity, investing in the convertible debentures provides a tax benefit to the investors.
  5. Liquidity: One more objective of choosing convertible debenture is that investments in it are usually more liquid than the regular equity investments. This can be bought and sold like any other investment because they are traded on major stock exchanges. This liquidity will help the investors to maintain their investment portfolios with greater flexibility and allow them to take advantage of the opportunities of the market.

It can be said that the convertible debentures prove to be a unique chance for the investors to make such an investment which maintains a balance between the return and the risk. Thus, because of various benefits the convertible debenture stands as the most chosen tool even though the traditional method of investments is available.

Types of convertible debentures

Fully convertible debentures 

These are the debentures that can be fully converted into equity shares or other into other forms of security, after the expiry of at the issuer’s notice. The rate of conversion is decided by the issuer. The investors acquire the same position as the shareholders of the company, following conversion. As per the SEBI guidelines, the conversion must be done at or after 18 months of the specified date, but prior to 36 months, the option is with the debenture-holders, whether to convert or not.

Partly convertible debentures

These types of debentures hold two parts, which are convertible and non-convertible. This gives an option to the debenture-holder to convert the convertible part into equity shares, on the expiration of the predetermined period. The non-convertible part can be redeemed by the debenture-holder on maturity, the option lies with the debenture-holder. Further, The conversion rate of these debentures is determined by the issuer during issuance of the. Furthermore, the debenture-holders then get the ownership of the company based on the part they hold.  

Non-convertible debentures

These types of debentures do not provide any option to the debenture-holders to convert it into equity shares, on maturity. It maintains its debt character throughout its term. 

Difference between fully convertible debentures and partially convertible debentures 

Basis of differenceFully convertible debenturesPartially convertible debentures
Feature of conversionThese are fully convertible into equity shares.Only the convertible part can be converted into equity shares.
Nature of the debenturesAfter conversion, these do not exist as debt instruments. The non-convertible part exists as a debt instrument, even after the convertible part is converted into equity shares, it retains this nature throughout the period.
Payment of the InterestThese pay interest to the debenture-holders until converted to equity shares.These pay interest to the debenture-holders, on the non-convertible part.
Conversion TimeThis is basically the time period from the issuance of the debentures. As the specified period expires the debenture is converted to the equity share. The conversion time varies according to the time period of the partially convertible part. 
Conversion Rate and PriceThe conversion rate and price is fixed at the time of issuance.The conversion rate and price is fixed at the time of issuance but this applies only on the convertible part.
Market ValueThe market value depends on the conversion rate and the interest rate.The market value depends on the conversion rate and the interest rate, however, this is a combination of an option to purchase a company’s equity and debt.

Process of issuing convertible debentures

A company can issue convertible debentures in two ways:

  • By private placement; or 
  • By inviting the general public to subscribe to its debenture.

The issuance of convertible debentures requires the shareholder’s approval. The Companies Act, 2013, under Section 71(1) explains that, at the time of debenture redemption if a company wants to issue convertible debentures then approval of shareholders is required through special resolution. The process of issuing the convertible debentures goes as follows:

  1. Inviting a meeting of the Board of Directors, to discuss the issues.
  2. Discussing and setting the date, time and location for the shareholder’s meeting.
  3. Giving the approval to someone to call for the general meeting.

For the private placement

  • Approval of the subscription agreement for the security of debt; 
  • Through the PAS 4 form, the approval of the offer letter;
  • Through the PAS 5 form, the approval of private placement records. 

PAS 4 form: This form is used by the company for the private placement of the securities. This form is mandated by the Companies (Prospectus and Allotment of Securities) Rules, 2014, which provides the investors with proper information about the private placements.  

PAS 5 form: This form is mandated under Section 42 (7) and Rule 14 (3) of the Companies (Prospectus and Allotment of Securities) Rules, 2014. This form gives the information about the shares issued by the company.

Some additional steps required

  • To carry out their duties, the permission of the debenture trustee is required.
  • For the appointment of the debt trustee, the acceptance of circumstances and terms are required.
  • The shareholders are given a notice of general meeting, as per the Secretarial Standard-2 and Section 101(1) of the Companies Act, 2013, there must be a 21 days long clear notice period.
  • A meeting of shareholders is called for the issuance of the convertible debt.
  • An approval to raise the threshold is required if the money to be borrowed combined with the already borrowed money exceeds the threshold limit.
  • The letter of offer is shared and a bank account is opened to receive the contribution by the investors to whom the debenture is issued.

Submission of forms

  • The forms PAS 4 and PAS 5 are submitted along with the GNL- 2  CHG-9 for creating a charge to show that secured debentures are issued.

GNL 2: Through this, a company registers certain documents of the company with the registrar of the company.

  • Using the format specified in the offer letter, the fund allocation is supplied to the company. 
  • A board meeting is called and debenture allocation is done as per the application received.

Additional points

  • The Board must name the debenture trustee and sign a debenture trust deed, before the offer letter is issued, within the sixty days of the allocation of debentures.
  • An approval is required of the proposed agreement for the development of the charge and encouraging the director to sign it. 
  • The acceptance of a draught Debenture Trustee deed in SH-12, drafted in favour of the trustee, is required.
  • The debenture allocations, granted to the applicants, are the responsibility of the board. Further, under PAS-3, the filing of allocation return, with the registrar of the company, is required, within the fifteen days of allotment. 
  • The debenture-holders are given the debenture certificate within the six months of the allocation.

Conditions to be considered when issuing debentures

  • The issuance of voting debenture is prohibited by an entity.
  • Until a debenture trustee is named, the company should not produce offer letters for subscriptions of more than 500 of its debentures.
  • In the case of secured debentures, the charge to be made on the assets of the company must be made in favour of the debenture trustee.
  • In case when debentures are redeemed, the company must establish a debenture redemption reserve account, through the profit available for the distribution of the dividend.
  • No such reserves are required for the fully convertible debentures but for partially convertible debentures, the reserve for the non-convertible part must be established.

Compulsorily convertible debentures (CCD)

When a company is thinking of raising the money, the biggest question that comes is what will help more, debt or equity. If equity is chosen then the company’s ownership will be diluted, while the debt will carry a high rate of interest. Other than these an alternate option that can help is the issuance of CCD, which can be converted into equity after the expiration of a particular period or after the occurrence of a specific event.

Nature of compulsory convertible debentures 

Compulsory convertible debentures carry a hybrid nature which shows the property of both, the debt and the equity. In the period under which the bond is active, the investors get the fixed interest payments, meanwhile, they also possess the right to convert it into equity when there is a growth in the stock price. The conversion ratio, which is set during the time of issuance, decides the number of shares allocated per debenture.

As the name suggests, the compulsory convertible debentures are the type of debentures which are required to be converted into equity shares after a certain period of time. This is a hybrid type of instrument, which is issued as a debt which carries a certainty of getting converted into equity shares. Compulsory convertible debentures are a combination of debt and equity. Therefore, it can be said that it has a dual nature. 

Equity-like feature: The compulsory convertible debenture is such a tool which can be converted into equity, either after a specified period of time or after an occurrence of any particular phenomenon. Because of its mandatory conversion characteristics, it cannot be directly referred to as a ‘debt’, as it carries a repayment obligation. It can instead be called a ‘postponed equity instrument’.

The Supreme Court, in a landmark case of Narendra Kumar Maheshwari vs. Union of India, [(1990) Suppl. SCC 440], ruled that it is hard to say whether a compulsory convertible debenture is a loan or debt, because for debt, there is an obligation to pay the principal amount to the investors, however, the compulsory convertible debenture does not provide any such repayment.

Debt-like feature: Now, the debt nature of the compulsory convertible debenture has also been a topic of debate in many cases. Considering the situation when the debenture is issued, it can be considered equity even before the allotment, however, if there is liquidation in the company before the allotment, then the debenture -holder holds the right to get the interest earned along with the principal amount, as expressed by the Monopolies and Restrictive Trade Practices Commission (MRTPC) in the case of DGIR vs. Deepak Fertilisers (81 Comp Cas 341) 1994. This situation reflects the debt-like feature of the compulsory convertible debentures. 

Hence, in the legal sense, the compulsory convertible debentures can be seen as the debt that can be paid off by issuing the shares of the company, but in a situation where the substance of the instrument matters, the compulsory convertible debentures are considered equivalent to the equity.

Compulsory convertible debentures under different laws in India

Company law

Under company law, there is no direct definition of the compulsory convertible debentures, but it showcases how it intends to regulate it.  As read above Section 2(30) of the Companies Act, 2013 defines ‘debenture’ as ‘bonds’, ‘debenture stock’ or ‘any other instrument of a company evidencing a debt’, this clears that the Company Law tends to regulate debentures as debt. 

When it comes to the authorisation part, the Companies Act, 2013 under Section 71 read with Rule 18 of the Company (Share Capital and Debentures) Rules, 2014 provides that the Company can issue the debentures with an option of converting them into the equity shares. Either partially or completely, with the approval of the debenture-holders through a special resolution. This again shows that the compulsory convertible debentures are regulated as debt.  

Security law

The company needs to comply with a few laws other than the company law, like SEBI Law. The ‘debentures’ are considered ‘securities’ under the Securities Exchange Board of India (Issue of Capital and Disclosure Requirements) Rules, 2009. This defines ‘convertible securities’ as the security which is either convertible into or exchangeable with the equity share with or without the discretion of the holders, at a later date. Hence, the SEBI has the power to administer the compulsory convertible debentures. 

Taxation law

When it comes to considering the compulsory convertible debentures for the taxation law, the main question that arises is whether it is to be considered debt or equity. If it is debt then the interest earned should be taxable or not. Another issue is about the deduction made on the issuance of the compulsory convertible debentures, as the issuing of capital is not classified as a revenue expenditure and, thus not eligible for deduction, this is a well-established rule. However, the issuance of debenture is classified as a debt instrument and therefore, tax deduction is done on it. So, the key question is whether the compulsory convertible debentures are to be considered as capital instruments or debt instruments. 

The Income Tax Act, 1961 (hereinafter “the IT Act”) under Section 36 (1)(iii) allows the deduction of the interest paid on the capital borrowed for a business, by the taxpayer. This means that the interest paid on the compulsory convertible debentures is deductible if they are considered as ‘borrowed’ capital under the IT Act, but there will be no deductions on the return paid on the equity investment if the IT Act considers it as the ‘equity’.

In the case of CAE Flight Training (India) (P) Ltd. vs. Dy. CIT (2022), the Bangalore Tribunal said that

“Until the date of conversion, the interest paid on CCD (compulsory convertible debenture) cannot be treated as interest on equity and that interest paid on debentures are allowable as expenditure under Section 36 (1) (iii).”   

The Tribunal, further, rejected the argument of considering the compulsory convertible debentures as equity, it further held that merely characterising the debt as equity, as per the policy of RBI, will not change its consideration of paid interest under the IT Act. 

In another case by the Delhi Tribunal, Religare Finvest Ltd. vs. DCIT (2023), observed that the compulsory convertible debentures are of the borrowed fund nature. It should be considered as a debt before the conversion to equity.  Therefore, the interest paid on the compulsory convertible debenture, under the IT Act is allowable expenditure.

The tribunals and courts have given different opinions in different cases, hence, the question of whether the compulsory convertible debentures be considered at debt or equity is still not very clear.

The Insolvency and Bankruptcy Code, 2016 (IBC)

As per the Insolvency and Bankruptcy Code, 2016 (hereinafter “the IBC”), under the definition of financial debt, the debentures are prima facie classified as ‘financial debt’. Under Section 5(8) of the IBC, the financial debt is a debt including the interest, that is repaid considering the time value of the money, which includes:

“Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debenture, loan stock or any similar instrument”

The question of its classification was raised in the case of IFCI Ltd. vs Sutanu Sinha (2023), where the argument was whether the compulsory convertible debenture should be considered a debt instead of an equity share.

The Apex court opined that after considering the definition of definition of debt in the code as ‘liability or obligation in respect of a claim’, the appealing party can be considered a part-owner (i.e. equity participant) of the company. The reason which was given, (in accordance with the subscription agreement) if the company is unable to purchase the shares after a specific period of time, it will automatically be converted into equity.

Therefore, the company cannot claim for any dues or debt from the Corporate Debtor (“CD”). So, it will be against the terms of the agreement if the instrument is considered a debt. It was further held that the investment is essentially a type of debenture which must compulsorily convert into equity, thus, it shouldn’t be considered a financial debt in any way, which means, it must be considered an equity.

Hence, it is an established rule by the court that any investment as debenture, which will compulsorily convert into equity share, shall be considered an equity.

The Foreign Exchange Management Act

Investments done in Indian companies, by non-residents, in any form, are governed by the Foreign Management Act, 1999 which is read with Foreign Exchange Management (Transfer or Issue of a Security by a person resident outside India) Rules, 2017 (hereinafter “the FEMA Rule). 

As per Regulation 2(xviii), ‘foreign investment’ is defined as the investment made on a repartiable basis, by any non-resident in the ‘capital instrument’ of an Indian company, or to the capital of an LLP.

Further, under Regulation 2(v), the ‘capital instrument’ is defined as the equity share, preference share, debenture and the warrant share issued by the Indian company. It is further explained that ‘debenture’ includes fully, compulsorily and mandatorily convertible debentures. This means that the fully, compulsorily and mandatorily convertible debentures are considered ‘capital instruments’, but the partially or optionally convertible debentures are considered debt instruments.

Under accounting standards 

Under these standards, the difference between the equity and debt is explained, which is laid down in Ind AS-32- Presentation of Financial Instruments (para 15 & 16).

It is further explained that, if the compulsory convertible debentures are converted into a fixed number of equity shares then it is considered as equity from the beginning, whereas, if it converts into an unpredictable number of shares, then it is considered as debt, from the beginning.

The compulsory convertible debentures, when converted into a fixed number of equity shares, with compulsory payment of interest, then it is named ‘Compound Financial Instrument’, then these are required to be divided into two parts, which are, financial liability and equity. A fair value of the liability component is determined by the company, before the division of the compound instrument’s initial carrying amount into, financial liability and equity. The fair value of the stand-alone debt instrument helps in deciding the fair value of the financial liability. After the deduction of the fair value of the financial liability fair amount from the complete fair value of the compound instrument, the residual amount is allocated to the equity part.

Optionally convertible debentures

The optionally convertible debentures are such debentures which provide an option to the debenture-holders to convert the debenture into the equity shares on the basis of pre-planned conditions. The conversion of optionally convertible debentures is not compulsory, unlike compulsory convertible debentures. The conversion can be done as agreed mutually by the parties or at the discretion of the debenture-holders. 

Nature of optionally convertible debentures

The optionally convertible debentures provide benefits to both, the company and the investors. During the term of the debenture, the company can raise the funds without facing major dilution on the ownership of the company. During the favourable market conditions or strategic opportunities, the company can take the advantage of them and can convert the optionally convertible debentures into equity shares. Also, till the debentures are converted into the equity shares, the investors earn fixed interest income, or it can be retained until maturity. The conversion at the later stage can benefit the investors with the potential gain. 

Process of issuance of optionally convertible debentures

For the issuance of the optionally convertible debentures, the companies must follow the regulations provided under the Companies Act, 2013. These are as follows:

  1. Approval of the Board: To authorise the issuance of the optionally convertible debentures, the Board of directors need to pass a resolution. In addition to that they need to determine the terms and conditions and the maximum number of debentures issued. 
  2. Approval of the shareholders: A special resolution is required to be passed at a general meeting to obtain the approval of the shareholders. The details of the proposed optionally convertible debentures proposed is provided in the resolution.
  3. Pricing and Valuation: The conversion price needs to be determined by the company for which it needs to conduct the valuation of the shares, and the valuation should be done by a registered valuer.
  4. Appointment of Debenture Trustee: To safeguard the interest of the debenture-holders, a Debenture-Trustee is required to be appointed, who will act as their representative.
  5. Offer letter and application: The company needs to prepare an offer letter which will consist of the terms and conditions of the issuance of the optionally convertible debentures. The investors who want to apply need to fill out an application form and make the required payments.
  6. Allotment and listing: The optionally convertible debentures are to be issued within 60 days of receiving the applications, and the debentures should follow the SEBI regulations if it is proposed to be listed on the stock exchange.

The optionally convertible debentures have come up as a significant type of financial instrument, benefitting both the investors and the company. It provides different options for the investors to make investments and gives flexible financial choices to the companies. This has made the capital markets more dynamic which has helped the Indian companies to grow and become more flexible.

Advantages and disadvantages of convertible debentures

Advantages of convertible debenturesDisadvantages of convertible debentures
The investors receive coupons, which are fixed interest payments.The investors stop receiving any interest after the debenture converts into equity shares. 
The debenture-holders can hold their bonds, if the stock price of the company goes down, till the maturity. In comparison to the traditional debt instrument, the convertible debentures give lower rates of interest.
The debenture-holders are paid prior to the shareholders, in the situation of liquidation.The case changes in the situation of bankruptcy. During bankruptcy, the secured creditors are paid prior to the debenture holders. This means the debenture holders are paid only after the secured creditors are satisfied.  
When the stock prices of the company are increasing or when the company is performing well, the investors, who are earning a fixed rate of interest can convert the bonds into equity, because of its hybrid nature. If the company’s stock price goes down, after the conversion, the investors may face loss.

Difference between convertible debenture and non-convertible debentures   

ParametersConvertible debentures (CD)Non-convertible debentures (NCD)
MeaningThe convertible debentures are the debentures that can be converted into equity shares, either fully or partially, after maturity.The non-convertible debentures are the debentures that can never be converted into equity shares after maturity. 
Interest rateIn comparison to the NCD, the CD gives a lower rate of interest.NCD gives a high rate of interest.
Value of maturityThe stock price of the company determines the maturity value of the CD. If the stock price is high then it will give high returns, but if the stock price is low then it will give low returns.The maturity value remains unchanged, it is fixed, the investors receive the return after the maturity.
Conditions of the marketThe debenture-holders can convert the bond into equity shares, in the situation of bad market conditions. The debenture-holders have no option to convert the bond into equity shares during the bad market conditions. To redeem the bond, they are required to wait till the maturity.
Status of the debenture-holdersThe debenture-holders carry dual status:i. Creditors; andii. ShareholdersThe debenture-holders have a single status of creditors.
Risk involvedThere is low risk involved, as the bond will be converted into equity shares.The risk is high in comparison to the CD because to get the payment the debenture-holders need to wait until maturity.

Risks of choosing convertible debentures

The convertible debentures provide a higher possibility of giving high returns, but, at the same time, there are some risks associated with buying it, which are as follows:

  1. Equity dilution: The time convertible debentures are converted to equity shares, there is a direct effect on the ownership of the shareholders in the company. This dilutes their ownership in the company and this also affects the shareholder value and the earnings from the per share.
  2. Risks with returns: Although the convertible debentures potentially give high returns, however, this comes with some risks, for instance, if the stock market is not showing the desired growth or if the stock price goes down, then the potential return will be low or the value of convertible debenture will go down, resulting to a loss for the debenture-holders.
  3. Risk arising due to fixed-income element: The convertible debenture provides a downside protection through a fixed-income element, in case there is a decline in stock price,  however, at the same time if there is an increase in the stock price, the fixed-income element will work as a limitation on the returns of the debenture-holders.
  4. Risk with the credits: This risk is associated with the debenture issuer, if the issuers fail in fulfilling their obligation  For instance, if they fail to pay the interest or fail to pay the principal amount back, then the investor will suffer the loss.
  5. Risk with the liquidity: The cash flow at times can become a problem for the investors, for instance, if there is a low demand for debentures in the market then the investors will face problems in selling it at the desired rates.

Although convertible debentures come with lots of benefits and advantages, there are some risks also associated with those benefits. To avoid these risks the investors are required to conduct proper research before investing and about the debenture terms. In addition, the investors should also look for additional investment options to diversify their portfolios.

Relevant cases on convertible debentures 

M/s. IFCI Limited v. Sutanu Sinha & Ors. (2023)

Facts of the case 

The facts of the case of M/s. IFCI Limited vs. Sutanu Sinha & Ors. (2023) goes in a way that, through a concession agreement, the IVRCL Chengapalli Tollways (ICTL), incorporated as a wholly owned subsidiary, was given a highway construction project by the National Highway Authority of India (NHAI). For some of its purposes, the company received a loan from a group of the lenders and to balance the project the IVRCL infused the equity. The firm, as a part of this, issued the compulsory convertible debentures (CCDS), which were later to be converted into equity shares after a certain period. 

The appellant (IFCI Limited), on 14th November 2011, initially consented to subscribe to the compulsory convertible debentures (CCDs) for a sum of ₹ 125,00,00,000. However, the company later faced some financial issues because of which it failed to pay the amount agreed upon to the creditors. As a result, the appellant and a number of shareholders filed for bankruptcy under the Insolvency & Bankruptcy Code, which led to insolvency proceedings. The appellant requested for the priority status of the ‘debtor’, in response to the insolvency proceedings, with the resolution professional. The claim made by the appellant was based on the ownership it carried in the issued debenture. However, the claim was dismissed by the resolution professional, and it instead classified the appellant as the ‘equity holder’.

The resolution professional gave reasons for the dismissal of the claim made by the appellant:

  • The CCDs should be considered as equity, under the terms of the debenture subscription agreement;
  • The funds raised are equity in the early concession agreement with the NHAI; and 
  • Should be considered as equity by the group of lenders.

The claim was rejected by the NCLT, which supported the decision of Narendra Kumar Maheshwari vs. Union of India & Ors. (1989), which stated that “A compulsory convertible debenture does not postulate any repayment of the principle….Any instrument which is compulsorily convertible into shares is regarded as “equity” and not ‘loan’ or ‘debt’.” 

An appeal was taken to NCLAT, where the NCLAT upheld the decision of NCLT, it further added that the IVRCL had the obligation to repay the interest and as per Section 5(8) of Insolvency and Bankruptcy Code 2016, the CCDs doesn’t fall under “financial debt’. 

Unsatisfied with the decision, the appellant took the case to the Supreme Court of India. 

Issues raised 

The main issue of the case was whether the CCDs can be considered ‘debt’ instead of ‘equity’, regardless of the wording of the CCDs, which must be read with the other documents and discussions inter se the parties.


It was observed by the Apex court that, after seeing the Debenture Subscription Agreement (hereinafter as “the DSA”) and the Concessionaire Agreement (hereinafter as “the CA”). It could be found that the IFCI was given security under the DSA, however, the obligation was always on the IVRCL, which was the sponsor, and not of the Corporate debtor. Therefore, the IFCI cannot claim for the recovery of the amount, assuming the role of the ICTL creditor, until and unless it is proved that the debt is of the ICTL.

The court relied on the case of Nabha Private Limited vs. Punjab State Power Corporation Limited (2017) and emphasised that the commercial courts should not try to examine the contract’s implied terms. This means that the contract must be read and understood what it explicitly stated and no extra meaning should be added or implied. The contract should be read as it is and the court should avoid adding or supplementing its meaning.

The order of NCLAT was upheld, stating that if the CCDs are treated as debt then it will be a breach of the Common Loan Agreement, especially the Concession Agreement, which has an overriding effect. It was observed that the issue of whether the CCDs should be considered as ‘debt ‘or as ‘equity’ has been correctly crystallised.

It was further ruled that there is no stated rule that explained that the CCDs would take the characteristics of the ‘financial debt’ upon any event and the investment made was clearly in the form of the debenture which was compulsorily convertible into equity.

The appeal was dismissed stating that the findings of the courts were in accordance with the established legal principles. 

Sahara India Real Estate Corporation Limited v. Securities and Exchange Board of India & Anr. (2013)

In the case of Sahara India Real Estate Corporation Limited vs. Securities and Exchange Board of India & Anr. (2013), the Sahara Real Estate Corporation Limited (SRECL) and Sahara Housing Investment Corporation Limited (SHICL) were the two subsidiaries of the Sahara India Pariwar. This case revolves around the investment fraud, where Subrata Roy (the founder) failed to fulfil its commitment to repay the investors the amount in excess of ₹ 2400 crores and the interest accumulated. 

Starting on 25th April 2008 until 13th April 2011, the SRECL and the SHICL invited the investors to subscribe to their optionally fully convertible debentures (OFCD) offerings. The total collection the company made during this period was exceeding 17, 656 crores, which was collected from around thirty million investors, under the shadow of ‘Private Placement’. This circumvented the legal restrictions on the public security offering. 

The SEBI stepped in during the period when the company was frequently increased from ₹2000 to ₹20, 000. And it also had restricted the two subsidiary bodies from obtaining more funds in the form of optionally fully convertible debenture, in November 2010.  

Facts of the case 

The main issue started when the Reserve Bank of India (RBI) restricted the Sahara India Pariwar from raising any additional deposits. The growth of the Sahara had always been under suspicion. There was a suspicion that it ran a Ponzi Scheme by collecting funds from investors. The group needed an uninterrupted supply of funds to continue and RBI was showing it hard times by putting restrictions on the collection of funds from the public. But Sahara needed an alternate tool to access the public fund.

The Sahara group decided to establish two companies, which were, the Sahara Real Estate Corporation Limited (SRECL) and Sahara Housing Investment Corporation Limited (SHICL), to offer the optionally fully convertible debentures (OFCDs). For these two companies, the Registrar of Companies (ROC) had to grant the approval.

There were several factors that played their role in this complex legal situation:

  1. The issuance of OFCDs was a public offering due to its vast size. So, if the company obtains funding from more than 50 investors, for that the SEBI has to give its approval, and the company has to adhere to the SEBI’s disclosure requirements. And Sahara sought investment for about 30 million investors.
  2. The next reason was that, normally the public offerings should close after six weeks of opening, however, Sahara kept the offerings open-ended, deliberately, and that too for ten years, resulting in the fund collection of ₹17, 250 Crores.

The trouble on Sahara escalated when it tried to raise funds through Sahara Prime City, through the stock markets. For this, the company had to file a Red Herring Prospectus (RHP), and reveal the financial data of the other group of companies. It was this time Dr. Kandathil Mathew Abraham (hereinafter as “Dr. Abraham”) (then the whole time member of SEBI) noticed the discrepancies with the SRECL and SHICL, and revealed that the funds raised by OFCDs offerings were masked as private placements.

It was observed by Dr. Abraham that, even though the company had a significant amount of money collected through the offerings, the records were not properly managed which could identify the investors. This raised the question of, to whom and how the returns would be repaid when even the professional agencies are not able to trace the investors.

To challenge SEBI’s findings, the Sahra group filed a case in the Securities Appellate Tribunal (hereinafter as “SAT”). The SAT, however, upheld the findings of SEBI, putting significance on the failure of Sahara in revealing the huge number of investors in their Red Herring Prospectus. 

Later, the Sahara group took the matter to the Supreme Court, but in August 2012, the Apex court ordered Sahara to repay the amount of ₹ 24,000 Crores, within 90 days to SEBI, which will be repaid to the genuine investors, by SEBI. The Sahara group contended that, over the years, it had already repaid a huge part to the SEBI and was left with only ₹ 5000 crores to be paid more.

Showing its dissatisfaction over Sahara’s tricks to delay the process, the Apex court, in October, warned the officials of the company with the possibility of detention, until the amount is repaid to SEBI. The bench observed that the company had not complied with the previous orders, and hence, summoned the founder  (Subrata Roy) and the other directors, to give reasons for the delays. But, Subrata Roy did not appear in court, which resulted in the issuance of a non-bailable warrant against him, with an order to appear in the Court by March 4. 

Issues raised 

There were several major issues raised before the court:

  1. Whether the SEBI was legally authorised to investigate and adjudicate this case under Sections 11, 11A, 11B of the Securities and Exchange Board of India Act,1992 and 55A of the Companies Act, 2013 or it was the Ministry of Corporate Affairs (MCA), which held the authority under Section 55A(c) of the Companies Act, 2013?
  2. Whether the OFCDs offered could be classified as “securities” under the definition of the Company Act, SEBI Act and the Securities Contract (Regulation) Act (SCRA), which would determine the SEBI’s authority to investigate and adjudicate this financial instrument.
  3. Whether the OFCDs issuance to a huge number of investors was to be considered a private placement, which will not make the company subject to various SEBI regulations and provisions of the Companies Act, 2013?
  4. Whether the provisions explained under Section 73 of the Companies Act, 2013 which gives the listing requirements required for all public issuings, or if it is at the discretion of the company to get the listings?
  5. Whether the Public Unlisted Companies (Preferential Allotment Rules) 2003 be applicable in this case and have any significance in OFCDs issuance?
  6. Whether the OFCDs should be considered convertible bonds, and if they are, are not subject to the application of the Securities Contract (Regulation) Act (SCRA) through Section 28(1)(b) or not.    


The Apex Court ruled that:

  1. The SEBI was legally authorised to investigate and adjudicate the case, emphasising on the duty of SEBI, to safeguard the investor’s interest, and this was not against the provisions of the Company Act. The Court further observed that SEBI holds a special power when it comes to safeguarding the investor’s interest, therefore, there is no conflict between the jurisdictional authority of MCA and SEBI.
  2. The OFCDs offerings done by the two companies were of a hybrid nature, despite that the OFCDs do come under the definition of “securities” under the definition of the Companies Act, SEBI Act and the Securities Contract (Regulation) Act (SCRA). The offering of OFCDs to a large number of investors qualified its ability to be traded as securities and the term “debenture” in its name codified its classification as securities.
  3. As per Section 67(3) of the Company Act, the security offerings made by a company and subscribed by more than 50 investors, qualifies as public offerings. Thus, the company must comply with the formalities of the public offerings. The Shara company exceeded the threshold limit and also avoided the formalities of listings, thus, it was subject to civil and criminal liabilities.
  4. As per Section 73(1) of the Company Act, the company should fulfil all the legal requirements of the listing of the securities at the stock exchange if it offers the securities and they are subscribed by more than 50 people as per Section 67(3). Hence, the listing of the public issuings is not at the discretion of the company, but mandatory as per the existing rules.
  5. The Public Unlisted Company (Preferential) Allotment rules 2003 applies only if the preferential allotments are made by the unlisted companies, but if there are public issues involved then this rule has no role.
  6. Section 28(1)(b) of the Securities Contract (Regulation) Act (SCRA) only excludes some specific types of convertible bonds and shares/warrants, from the purview of SCRA, but the debentures which are a different classification of securities under Section 2(h) of SCRA, are not exempted from the purview of SCRA.

Rejecting the contentions of the appellant, the Supreme Court ordered the Sahara company to repay all the funds deposits collected, and in addition to that the 15% interest applied until the refund date. Along with this, a non-bailable arrest warrant was issued against the chairman of Sahara India Company and the other members, who failed to comply with the order of refund. The Court also upheld the authority of SEBI and gave it additional powers to formally implement the refund orders. 

Director General of Investigation and Registration v. Deepak Fertilisers and Petrochemicals Corporation Ltd. (1994)

Facts of the case

In the case of Director General of Investigation and Registration Vs. Deepak Fertilisers and Petrochemicals Corporation Ltd. (1994), there were some debenture offerings issued publicly by the respondents on specific conditions and promises. There were some enquiries and compensation applications made related to these offerings. The claim was that the companies who were making the offerings made some misleading and false claims in the prospectus, to raise the funds by issuing the debentures. This made the companies liable under Section 36A of the Monopolies and Restrictive Trade Practices Act, for participating in unfair trade practices. Thus, all the respondents were appearing in the court in lieu of the notice served to them, and objecting to the jurisdiction of the Commission to investigate the matter.

Issues raised 

  1. Whether the “debenture” be classified as “goods” under Section 2(e) of the Monopolies and Restrictive Trade Practices Act, 1969, considering its characteristics and true legal nature, even before it is allocated to the debenture holders?
  2. Whether the “debenture” be classified as ‘goods’ under Section 2(e) of the Monopolies and Restrictive Trade Practices Act, 1969, if the debentures are compulsorily or optionally convertible to equity shares?
  3. Even if the debentures are “goods” before allocations, whether there are any trade practices that can call for application for debenture allocation to raise funds for the business or trade?
  4. Whether the company, under Section 2(r) of the Monopolies and Restrictive Trade Practices Act, 1969, provide any service to the potential investors, where it invites the applications of issuing debentures and issues debentures?


The court observed that:

  1. Section 2(e) of the Monopolies and Restrictive Trade Practice Act 1969 defines “goods” as, 

“goods’ includes goods produced in India, and, in relation to any goods, supplied, distributed or controlled in India, also includes goods imported into India.”

Clause (ii) of the Section was amended in 1991 and is read as

“(ii) shares and stocks including issue of shares before allotment;”

There is no specific definition of “debenture” in the Monopolies and Restrictive Trade Practice Act. The debentures are categorised as a debt instrument by the issuing company until it is distributed among the debenture-holders. At the same time, debentures are considered “actionable claims” under Section 2(7) of the Sales of Goods Act 1930, and the Transfer of Property Act 1882,

Section 2(7) of SOGA 1930: “goods” means “every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;” 

Under Section 3 of TPA: “actionable claim” means “a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent;” 

until and unless they are protected by a mortgage. The Legal experts and some authoritative organisations also affirmed that until and unless they are protected by a mortgage, the debentures do not come under the definition of  “goods” of the Monopolies and Restrictive Trade Practice Act 1969. Therefore, rather than a tangible property, debentures are financial instruments, as per its nature.   

  1. The debenture, either compulsorily convertible or optionally convertible, will not be covered under the definition of “goods” under Section 2(e) of the Monopolies and Restrictive Trade Practice Act 1969. 

The reasons being:

  • The debenture, under Section 2(7) of the SOGA, 1930 is considered an actionable claim, until and unless it is allocated to the debenture-holders. The position of the debenture, before allocation, remains unchanged under the Amended law.
  • Debentures are debt instruments and not equity, therefore, it is different from stocks and shares. Debentures, either compulsorily convertible or optionally convertible, will remain in their debt characteristic until they are converted into equity shares.

Therefore, either compulsorily convertible debentures or optionally convertible debentures, are not considered ‘goods’  under the Monopolies and Restrictive Trade Act.

  1. Even if the debentures are considered “goods”, before its distribution among the debenture-holders, the act of offering the debentures to raise funds won’t be considered a trade practice. This conclusion was drawn after considering the two cases, one dealt with by the Apex court, which is, the DIT (International Taxation), Mumbai vs. Morgan Stanley and Co. Inc. 2007 and the other one dealt with by the full bench of the Commission, in the case of T.T.K. Pharma Ltd. vs Collector of Central Excise (1992).

In the case of T.T.K. Pharma Ltd. vs Collector of Central Excise (1992), the Commission observed that the issuing of debenture cannot be linked to the act of carrying on a trade, instead it is a way to raise funds using which the company can carry on its business that it has mentioned in its prospectus. In a similar way, in the case of DIT (International Taxation), Mumbai vs. Morgan Stanley and Co. Inc. (2007), the Apex court observed that if a company is issuing capital to raise money to carry on its business, then that cannot be considered a trade practice if there is no sale or purchase of the debentures. 

Hence, if a company is issuing debentures to raise funds to carry on its business is not a trade practice under the Monopolies and Restrictive Trade Act, even if it is considered “goods” before the allocation.  

  1. Section 2(r) of the Monopolies and Restrictive Trade Act defines “service” as

“Service which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, chit-fund, real estate, transport, process, supply of other energy board or lodging or both, entertainment, amusement, or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service.”

These are the services listed under this provision which are available to the potential users. However, these services do not include inviting the investors to invest in the stock market for debenture subscription. 

Taking the decision of DIT (International Taxation), Mumbai vs. Morgan Stanley and Co. Inc. (2007) into consideration, the court ruled that the investors, by applying for the debentures, do not buy any “goods” in exchange for money, nor do they hire any service from the company.

Therefore, if a company is inviting the investors to subscribe for debentures, then that is not a “service” under the Monopolies and Restrictive Trade Act.

The court dismissed the case saying that the Commission has no jurisdiction in this case and thus, no order as to the costs was passed.

Narendra Kumar Maheshwari v. Union of India and Ors. (1989)

Facts of the cases 

In the case of Narendra Kumar Maheshwari vs. Union Of India and Ors. (1989), the Reliance Industries Ltd. (hereinafter as “RIL”) and Reliance Petrochemical Industries Ltd. (hereinafter as “RPL”), are the two interconnected companies of Reliance Group. Incorporated in 1988, RPL was RIL’s fully-owned subsidiary company. The RPL decided to issue convertible debentures, to fund this project. The Controller of Capital Issues (hereinafter as “CCI”), issued the non-statutory guidelines for approving the issuance of convertible and non-convertible debentures. An application was submitted by RPL for the issuance of fully convertible debentures worth ₹200 Crores, with staggered conversion terms into equity shares. 

The debenture issue was earlier sanctioned by the CCI but later it was amended, which implemented some restrictions on the transferability of the shareholders and also included that for issuing the debentures to the non-resident, the company would require to take permission from the Reserve Bank of India (hereinafter as “RBI”). This also imposed restrictions on the employees; ability to transfer the shares.

There was outrage among the investors and many cases were taken to various High Courts challenging the sudden swiftness in the CCI’s process. The concerns were raised regarding the CCI’s non-compliance with the guidelines, not considering the viability of the project, licence and the financial stability. There were additional concerns about the misleading exposures in the prospectus and the special preference being given to the RIL.

The case was intervened by the Supreme Court, restraining the injunction on the issuance of the debentures. 

Issues raised 

  1. Whether CCI didn’t follow the proper guidelines?
  2. Whether there was a discrimination, and the CCI was favouring RIL?
  3. Is the prospectus misleading, showing the debentures as “full secured convertible debentures”?
  4. Whether there was a lack of security and ignorance of the guidelines by CCI that made the issuance of debentures against the public interest?


The Apex Court observed that:

  1. The CCI did apply its mind while evaluating and issuing the debentures. The CCI further has taken all the factors into consideration and abided by all the guidelines and has also shown its decision-making skills. Considering its authority in the matter, the decision of CCI is not subject to judicial review.
  2. There was no evidence showing the CCI’s favouritism towards RIL. CCI was well versed with the purpose for which the debentures were issued because it was done by the RIL, originally. RIL was the promoter company which conceived the project, got it sanctioned, invested its time and money and transferred it to RPL for implementation. So, in this situation, if RIL got some shares without going through a few processes that other investors were to go through there was nothing wrong with that. 

Furthermore, the debenture loan for the other investors was secured but it was not the same for RIL, that means, the investors had some advantage with it but RIL didn’t have any, so if there were any problems or disadvantages to be faced by the investors in paying the premium, then that cannot be made a ground for discrimination. 

  1. The prospectus stating the debentures as “fully secured convertible debentures” was not misleading because, the RIL stated in it that the security will be provided to the satisfaction of the trustees, which was accepted by CCI also. The CCI couldn’t ensure anything beyond the standard practice which was to be followed, since the trustees are reputable financial institutions. Also, the debentures here are compulsorily convertible debentures, therefore, they were to be converted only after the consent of the debenture holders was given through a meeting.
  2. The CCI has worked as per the principles, it has not done anything which does not count in its duty. Its act is impartial and bona fide. There is no significant harm or injury suffered by the petitioners nor there was any prejudice done. Furthermore, there was no irrationality, and none of the actions were taken which would prevent the legitimate authority from making any decision. Therefore, there was no need to interfere with its duty nor was there anything which was against the public interest. 

The writ petition was dismissed by the Supreme Court.


Debentures are the instruments used by the investors to raise funds for their business, it has various categories, one of which is convertible debentures. Convertible debentures are one of the fantastic tools that the investors can use to take the benefit of both debt and equity. Furthermore, the debenture holders are given a unique balance between the fixed income and the capital growth possibility by giving them a choice to convert their investment into equity shares after a specific time. This unique feature benefits the debenture holders with the higher potential returns when there is a growth in the stock price of the company. Moreover, because of fluctuations in the market, the fixed income provides a buffer, and the convertible debenture at the same time provides downside protection.

Different types of debentures meet the different inclinations and business goals of the investors. One type is optionally convertible debenture which provides flexibility with the conversion terms, which can be based on some predetermined conditions, then there is another named compulsorily convertible debenture, which converts only after the expiration of the predetermined period. Therefore, it is important for issuers and the investors to understand the nature of both the types.

There are many benefits of convertible debentures, but at the same time, it also carries some risks. Some of the risks that the investors should know about are like fluctuations in the market, dilution of the equity, credit issues and issues in the liquidity. To reduce these risks there is a need for proper due diligence and risk evaluation is much needed to make wise investment decisions. Therefore, the investors should always do a thorough research about the convertible debentures, before investing in them.

With proper understanding about the convertible debentures and risks associated with it, it can provide long term financial growth and stability and add value to the portfolio of the investors. 

Frequently Asked Questions (FAQs)

What is a zero-interest convertible debenture?

A zero-interest debenture is the debenture that pays no interest to the debenture-holders. This provides no fixed interest to the debenture holders during the term of the debenture. The investor’s return is equal to the difference of the face value and the price of issuance. 

Can debentures be converted into shares?

Yes, the debentures in the form of convertible debentures can be converted into shares. The convertible debentures are the type of debentures which can be converted into the equity shares after the maturity or at the discretion of the debenture-holders. These conversions are done at predetermined exchange rates, after a specific period of time.

What is the special resolution passed by the company for the conversion of the debenture into shares?

The special resolution is a formal decision made by the company’s shareholders in a general meeting, which requires a higher majority vote in comparison to an ordinary resolution. In this case, the special resolution consists of the major details about the conversion like the conversion authorisation, conversion ratio, interest rate, required changes in the article of association of the company and other government documents, and the authorisation given to the board of directors and other officers to check the conversion process and allocation of shares.

Can convertible debentures be traded on stock markets?

Yes, the convertible debentures can be traded on the stock markets. This provides liquidity to the investors. However, in India the convertible debentures are not actively traded except for some reputed companies, and these are regulated by the Securities and Exchange Board of India. 

How are the optionally convertible debentures different from the compulsory convertible debentures?

The optionally convertible debentures provide options to the debenture-holders, either to redeem the debenture or to convert it into equity shares, whereas, the debenture-holders holding compulsory convertible debenture do not have any such option, the debenture has to convert into the equity shares after the maturity.

What tax liabilities are there on the convertible debentures?

The tax liability lies on the interest gained and the principal capital gained on the debentures, by the investors, when the convertible debentures are converted into the equity shares and those shares are sold at a profit.


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