Equity or Debt? Decoding CCD Classification under the IBC in Light of IREDA v. Waaree

Introduction

The rise of hybrid instruments in corporate financing has introduced nuanced challenges within India’s insolvency framework, particularly in distinguishing between debt and equity. Compulsorily Convertible Debentures (“CCDs”) exemplify this complexity: by design, they carry characteristics of both debt instruments and equity shares. While the Companies Act, 2013 recognises CCDs as a form of debenture that must convert into equity on redemption or maturity, the Insolvency and Bankruptcy Code, 2016 (“IBC”) predicates the right to initiate insolvency proceedings on the existence of a “debt” or “financial debt”. This dual identity has led to conflicting interpretations in tribunal and court decisions, resulting in uncertainty for creditors, debtors, and insolvency professionals. The National Company Law Appellate Tribunal’s (“NCLAT”) recent ruling in Indian Renewable Energy Development Agency Ltd. v. Waaree Energies Ltd. (“IREDA v. Waaree”), delivered in April 2025, represents the latest, and most definitive, judicial effort to reconcile these tensions. By analysing contractual stipulations alongside functional aspects—such as redemption rights and interest obligations—the NCLAT has articulated a clearer test for classifying CCDs under the IBC. This blog examines the statutory underpinnings, traces the evolution of judicial reasoning, contrasts the NCLAT’s approach in IREDA v. Waaree with earlier pronouncements, and offers suggestions for legislative and regulatory refinement aimed at enhancing predictability and commercial certainty in insolvency proceedings.

Statutory Landscape

The classification of CCDs under the IBC hinges on two fundamental statutory definitions. Section 3 of the IBC defines “debt” as “a liability or obligation in respect of a claim which is due from any person,” and Section 5(8) extends “financial debt” to include amounts raised through “the issue of bonds, notes, debentures, loan stock or any similar instrument.” In parallel, the Companies Act, 2013 treats CCDs as a subset of debentures under Section 71(1), mandating their conversion into equity shares upon redemption or at maturity. By contrast, the Foreign Exchange Management Act, 1999 (“FEMA”), alongside its regulations, classifies CCDs as equity from inception, thereby affecting foreign investment norms such as mandatory lock-in periods and restrictions on repatriation. The consequence of these divergent classifications is a pressing need for clarity when insolvency proceedings are initiated against issuers of CCDs. In an insolvency context, the IBC’s special regime must prevail over FEMA’s equity treatment, yet the absence of express statutory guidance on hybrid instruments has compelled courts and tribunals to fashion tests based on contract construction and functional attributes. The result has been a patchwork of decisions that, until recently, left stakeholders uncertain about where CCD holders would rank in the creditor hierarchy.

Judicial Precedents

India’s apex court and the NCLAT have grappled with CCD classification in a series of decisions that reflect evolving analytical emphases. In M/s IFCI Ltd. v. Sutanu Sinha, the Supreme Court underscored the primacy of contractual wording, holding that CCDs which provided for automatic conversion into equity on a specified date lacked any enforceable obligation of redemption and thus constituted equity instruments. The Court cautioned against judicial interpolation, emphasising that commercial documents drafted by experts must be read as they stand. Subsequent NCLAT decisions introduced the so-called “test of repayment”, whereby CCDs that carried no liability for principal repayment but merely converted into equity were deemed equity instruments, since the essential feature of debt—an enforceable obligation of repayment—was missing. However, the tribunal’s later ruling in Agritrade Power Holding Mauritius Ltd. v. Ashish Arjunkumar Rathi qualified this approach by recognising that accrued interest on matured but unconverted CCDs could nevertheless rank as financial debt. This decision signalled that, even in the absence of principal repayment, ancillary monetary obligations—if contractually enforceable—could tip the scale in favour of a debt classification. Meanwhile, the Supreme Court’s observation in Narendra Kumar Maheshwari v. Union of India & Ors. that CCDs “do not postulate any repayment of principal” highlighted their intrinsically hybrid nature but provided no definitive test. Collectively, these judgments oscillated between formalistic reliance on the presence or absence of a principal repayment obligation and a more functional analysis of monetary features such as interest and redemption rights.

M/s IFCI Ltd. v. Sutanu Sinha

In IFCI Ltd. v. Sutanu Sinha, the Supreme Court considered CCDs issued by IFCI to the corporate debtor, which were subject to automatic conversion into equity shares on a predetermined date. The debtor argued that these instruments should be treated as financial debt under Section 5(8) of the IBC, whereas IFCI maintained they were equity by their very nature. The Court resolved the issue by examining the Debenture Subscription Agreement’s express conversion clause and noting the absence of any redemption obligation or explicit interest entitlement. It held that, since the instrument offered no avenue for repayment, it could not constitute debt. The decision reinforced the maxim that courts should avoid importing implied terms into expertly drafted commercial contracts. By focusing on the contractual mechanism for exit—automatic conversion without redemption—the Supreme Court established that an absence of repayment rights is dispositive of equity classification, thereby providing a definitive yardstick for CCDs with automatic conversion features.

Shubham Corporation and Agritrade Decisions

The NCLAT’s ruling in Shubham Corporation Pvt. Ltd. v. Kotoju Vasudeva Rao applied a similar logic to that of IFCI Sinha, emphasising that CCDs carrying neither principal repayment obligations nor interest liabilities must be classified as equity. There, the agreement provided for automatic conversion at the end of a ten-year period, with no parallel redemption pathway or enforceable monetary claim. The tribunal held that such CCDs lacked the “obligation of repayment” fundamental to a debt instrument, and thus could not be treated as financial debt. Conversely, in Agritrade Power Holding Mauritius Ltd. v. Ashish Arjunkumar Rathi, the NCLAT confronted CCDs that had matured but remained unconverted due to inaction by the debtor. Although the agreement allowed conversion, the creditor pursued payment of accrued interest, leading the tribunal to recognise that the interest component, by virtue of its enforceability, qualified as financial debt. The Agritrade ruling demonstrated that, even where principal repayment is absent, ancillary monetary entitlements—if contractually enforceable—must be viewed through the lens of the functional test of debt. This pragmatic turn hinted at an evolving jurisprudence, one that looked beyond a binary focus on principal repayment to the broader spectrum of financial obligations embedded in CCDs.

The IREDA v. Waaree Energies Decision

The NCLAT’s most recent and authoritative pronouncement in Indian Renewable Energy Development Agency Ltd. v. Waaree Energies Ltd. crystallises the functional approach to CCD classification under the IBC. In this case, Waaree Energies Ltd. had subscribed to CCDs issued by Taxus Infrastructure and Power Projects Pvt. Ltd. Through a Debenture Subscription Agreement, the CCDs carried an optional conversion feature exercisable by the investor on one month’s notice, alongside a clear default-triggered redemption mechanism. Upon default, the investor was entitled to payment of principal and interest at 24 percent per annum. The resolution professional initially treated Waaree’s arbitral award for principal and interest as establishing financial creditor status, only to be challenged on the grounds that CCDs are inherently equity. The NCLAT, however, upheld the resolution professional’s view, observing that the debentures in question bore all the hallmarks of debt: an enforceable claim for principal and interest, a contractual right to redemption on default, and a clear articulation of time value of money. Distinguishing IFCI Sinha and Shubham Corporation on their facts, the tribunal emphasised that, unlike in those cases, the instrument at hand granted a substantive redemption right alongside optional conversion. By construing the parties’ bargain in its entirety, the NCLAT concluded that these CCDs constituted “financial debt” under Section 5(8)(c) of the IBC, thereby entitling Waaree Energies to participate in the Committee of Creditors and assert its claim in insolvency proceedings.

Comparative Critique

The IREDA v. Waaree ruling represents a decisive shift from the formalistic approaches of earlier cases to a more holistic, substance-over-form analysis. While IFCI Sinha and Shubham Corporation rested on the absence of repayment obligations, the NCLAT’s recent decision demonstrates that enforceable interest and redemption rights are equally pivotal in determining whether a CCD is a financial debt. The tribunal’s insistence on honouring the express terms of the Debenture Subscription Agreement aligns with the Supreme Court’s injunction against judicial embellishment of commercial contracts. Moreover, by situating the analysis within the broader commercial bargain—recognising that investors paid capital in anticipation of either conversion or redemption—the tribunal has avoided the absurdity that might ensue if a debt-like instrument were reclassified as equity merely because of its hybrid label. Importantly, IREDA v. Waaree reaffirms that the IBC’s special insolvency regime must prevail even where FEMA classifies CCDs as equity for foreign exchange purposes. This jurisprudential clarity is likely to discourage frivolous challenges to creditor claims and foster a predictable environment for hybrid instrument issuance.

Policy Implications

The NCLAT’s approach in IREDA v. Waaree carries far-reaching implications for corporate finance and insolvency practice. For issuers and investors, the ruling underscores the critical importance of contractual precision in drafting CCD terms, especially regarding redemption triggers, interest entitlements, and conversion mechanics. Legal counsel must ensure that agreements clearly articulate the circumstances under which a CCD will function as debt or equity, thereby minimising ambiguity in insolvency scenarios. Insolvency professionals, for their part, may now apply a consistent test centred on enforceable monetary rights, reducing the scope for protracted litigation and accelerating resolution processes. From a regulatory standpoint, the divergence between FEMA’s equity treatment and the IBC’s debt classification highlights a structural inconsistency in India’s statutory framework. Harmonising these regimes—either through legislative amendment or clarificatory notifications—would eliminate potential conflicts for foreign investors and insolvency stakeholders. Finally, the judiciary’s reaffirmation of contract sanctity in IREDA v. Waaree reinforces India’s commitment to upholding commercial bargains, thereby enhancing the country’s reputation as a reliable destination for sophisticated financing arrangements.

Recommendations for Reform

To consolidate the gains of IREDA v. Waaree and further strengthen India’s insolvency architecture, several measures merit consideration. The Insolvency and Bankruptcy Code could be amended to include a specific definition for hybrid instruments, clarifying that any security carrying enforceable redemption or interest rights qualifies as financial debt. Such an amendment would pre-empt interpretative disputes and streamline judicial analysis. The Insolvency and Bankruptcy Board of India might issue guidance notes or best-practice templates for drafting CCDs, emphasising key clauses that govern conversion mechanics, default-triggered redemption, and interest accrual. Collaboration between the Ministry of Corporate Affairs and the Reserve Bank of India could yield harmonised regulations that align FEMA policy with insolvency norms, ensuring that a CCD’s classification under one regime does not undermine its treatment under another. Capacity-building initiatives for insolvency adjudicators and resolution professionals—through workshops, seminars, and published commentaries—would foster a deeper understanding of the functional debt test and its practical application. Market participants should be encouraged to include explicit insolvency-event clauses in all CCD agreements, stipulating the instrument’s treatment on default, winding up, or liquidation, thereby pre-empting contractual gaps.

Conclusion

The NCLAT’s decision in Indian Renewable Energy Development Agency Ltd. v. Waaree Energies Ltd. marks a watershed in the treatment of compulsorily convertible debentures under India’s insolvency regime. By anchoring the classification test in the express terms of the contract and the enforceable monetary obligations it creates, the tribunal has moved beyond a narrow focus on nomenclature to embrace a commercially sensible, substance-over-form analysis. This approach not only brings coherence to a previously fragmented jurisprudence but also instils greater predictability for issuers, investors, and insolvency professionals. To capitalise on this clarity, legislative and regulatory reforms are necessary to harmonise India’s broader statutory landscape and codify the principles articulated in IREDA v. Waaree. In an era of increasingly complex financing structures, a robust insolvency framework that honours commercial bargains while protecting creditor rights is indispensable. The IREDA v. Waaree ruling represents a significant stride in that direction, laying a solid foundation for the future evolution of hybrid instrument jurisprudence in India.