Introduction:
The debate on whether Compulsorily Convertible Debentures (CCDs) should be classified as either debt or equity remains a thorny point at the border between accounting standards and judicial interpretation. Although Indian Accounting Standard (Ind AS) 32 offers an ordained framework to form the nature of financial instruments in relation to the contractual requirement and economic material, the judgmental utterances have frequently assumed context-based solutions, thereby resulting in the emergence of apparent contradiction. This deviation is especially critical when it comes to tax and insolvency cases, when classification directly affects financial reporting and legal consequences. This is complicated even more by the fact that the courts sometimes make observations that are not part of the main case, and that can cast doubt on their precedential authority.
This blog looks critically at the treatment of CCDs under Ind AS 32 and emerging judicial views and contends that a number of these judicial observations could simply be in the nature of obiter dicta and not ratio, making the application of Ind AS 32 only significant authority in determining the issue of whether the CCDs are to be considered a debt or equity.
Indian Accounting Standard (Ind AS) 32
Constitutional Validity:
Ind AS were notified by the Ministry of Corporate Affairs, Government of India, under section 133 of the Companies Act 2013 after getting the recommendation for the same from the National Financial Reporting Authority (NFRA) constituted under the Companies Act 2013. These standards were notified to NFRA by the Institute of Chartered Accountants of India (ICAI). These standards were notified as rules, which are now called as the Companies (Indian Accounting Standards) Rules, 2015.[1]
The constitutional validity and importance of these accounting standards were explained by the Hon’ble Supreme Court in the matter of J.K. Industries Ltd. v Union of India[2] while holding that Ind AS 32, which relates to deferred taxation, is not inconsistent with the Companies Act 1956, the Income Tax Act 1961 and the Constitution of India. The court, from para 4 to para 8 of the judgement, while explaining the importance of Ind AS 32, held that
“Accounting Standards, defined by the Institute of Chartered Accountants of India, are policy provisions that govern the recognition, measurement and disclosure of financial statements to make them true, fair, transparent and comparable. They develop out of the traditional concepts of matching concept to fair value and they strive to align Indian practices with the international standards of fair value like IAS/IFRS and minimizing subjectivity in accounting by creating uniformity in estimations like depreciation, provision and asset valuation. The standards assist in filling the disconnect between accounting income (real income) and taxable income (which is usually determined through artificial rules), and the long-term goal of transforming accounting income into a stable tax base, which thus reduces distortions and improves consistency, transparency and accuracy in financial reporting.”
Relevance of Ind AS[3]:
The Objective of Ind AS 32 is mainly to establish principles for the representation of financial instruments as equity or liability and to provide rules for offsetting the same. It mainly deals with setting up the rules for the issuer or from the perspective of the issuer.
CCD, being a hybrid security or financial instrument, its treatment in the books of accounts is governed by Ind AS 32. Para 11 of the accounting standard states that a financial asset is an asset which, as per clause c(ii), gives a contractual right to the issuer of the financial asset to receive in exchange for the financial asset issued by him, some other financial asset or liability which is favourable to the entity, i.e. the issuer. Here, favourable means favourable in all situations and something can only be favourable once it is known to the issuer. This implies that when while issuing a financial instrument at a conversion rate i.e., what issuer needs to pay in exchange for that financial instrument, is already known to the issuer, then that shall be considered as favourable. This is because if the issuer knows in advance what he needs to pay, still if he issues that particular kind of security, then it can be presumed that it will benefit him or will be favourable to him.
In case of CCDs, which is a kind of financial instrument and the rate of conversion of which is decided on the date of conversion i.e., whenever a CCD is converted into equity; on the date of conversion if the price of equity falls, the number of equity to be issued shall be higher.
For example – A, a shareholder, was issued a CCD that costs Rs.100/- and the price of equity on the date of issuance was Rs.50/- per share, and on the date of conversion of the CCD, the price is dropped to Rs.10/- per share. In this situation, the issuer, who at the time issue was liable to give 2 shares, is now liable to give 10 shares to A, which is not beneficial to issuer.
Therefore, we can say that as per para 11, CCD is not a financial asset, rather it’s a financial liability.
Para 16, if the Ind AS 32 says that a financial instrument as defined under para 11 is a financial asset only if it fulfils both the conditions as classified under (a) and (b) of para 16.
Explanation to para 16 (a) is provided under para 17, wherein it is mentioned that one thing which makes a financial asset, a financial liability, is the existence of contractual obligation of a party i.e. the issuer, to deliver either the cash or any other financial instrument to any other party who is the holder of security under such a condition which is unfavourable to the issuer. As discussed previously, CCD is a financial instrument that is unfavourable to the issuer, as the issuer, while issuing the same, is not aware of the fixed number of equity instruments that he needs to pay back in exchange for such CCD.
Explanation to para 16 (b) is provided in para 21 and 22. Para 21 says “A contract is not an equity instrument solely because it may result in the receipt or delivery of the entity’s own equity instruments”. Therefore, merely because the issuer is providing an equity instrument in exchange for CCD does not make a CCD an equity. Moreover, it provides two examples, wherein it states that if an entity enters into an agreement where it is ready to pay as many as securities or equity instruments which are equal to the value of Rs.100/- then the instrument that is issued in a financial liability and the same is the case with the CCD, because at the date of conversion into equity the issuer needs to provide as much as an equity shares which are equal to the principle amount that needs to be repaid on CCD.
Para 22 states that “a contract that will be settled by the entity by receiving or delivering a fixed number of its own equity instruments in exchange for a fixed amount of cash or another financial asset is an equity instrument” i.e., if fixed number of own equity instruments are issued by the issuer in exchange of cash or financial asset, which in present scenario is CCD, then in such situation it shall be a financial asset. However, CCD never allows the issuer to deliver a fixed number of its own equity instruments as the price of the equity instrument fluctuates, leading to fluctuation in the liability of delivering a number of equity instruments.
Further, another crucial point which is to be considered under para 22 is “Changes in the fair value of a contract arising from variations in market interest rates that do not affect the amount of cash or other financial assets to be paid or received, or the number of equity instruments to be received or delivered, on settlement of the contract, do not preclude the contract from being an equity instrument.” Here it says that change in fair value of contract occurs due to change in market interest rate. If that is to be applied to CCDs, it would require that if a CCD of Rs.100/- has been issued then because of market rate or inflation, the value of these Rs.100/- may increase to Rs.140/-, and in such situation, such change should not affect value of financial asset to be paid in exchange of the value of CCD. However in case of CCD, its not the value of contract that affects the number of equity instrument to be paid in exchange of the CCD, while it is the nature of CCD which demands for repayment of the principle amount and fluctuation is because of change in the value of equity instrument to be paid by the issuer to the holder.
There are some other financial instruments which are also provided as an example in the accounting standard itself, which makes the issuer liable to pay an equal number of equity instruments in exchange for financial instruments issued. One of the examples which is cited in para 22 is that “an issued share option that gives the counterparty a right to buy a fixed number of the entity’s shares for a fixed price or for a fixed stated principal amount of a bond is an equity instrument.”
Therefore, the above discussion makes it clear that, as per Ind AS 32, CCD is not a financial asset, rather it is a financial liability.
A judgement is an authority for what it decides:
The jurisprudence of the precedential value clearly provides that only those propositions that come up to be determined and are required to make a decision on the lis constitute the ratio decisions, all other observations are obiter dicta and are not binding. In Arun Kumar Aggarwal v. State of M.P.[4] the Supreme Court made it clear that, obiter dictum is nothing but a mere observation or remark by the court by way of an aside; any statement that is not necessary to the point is not a part of the authoritative core of the judgment.
This principle has been applied consistently in tax jurisprudence although not a tax case itself, such as in Gerard Perira v. Income-Tax Officer[5] the Madras High Court used this doctrine when dealing with an income tax case. The assessee in Gerard Perira appealed against some of the additions made by the Assessing Officer, and the Court must decide whether such additions were within the law, but it applied the principle that the only observations relevant to the decision of the dispute were binding, and that other observations were merely incidental.
In the same case, Jarnail Singh v. Lachhmi Narain Gupta[6] the Supreme Court once again emphasized that an opinion which is not necessary to fulfil the purpose of or which does not fall to be determined of a case is obiter dictum and is not binding. Even the case itself was framed against the issue of constitutional and service law of reservation in promotions but the Court used the occasion to reiterate the time-tested doctrine that only the ratio is a binding precedent and thus cemented its applicability across the board, even in tax adjudication.
The principle presupposes its special relevance in tax law, as exemplified in CIT v. Sun Engineering Works (P) Ltd.[7] Whereupon, the assessee desired to revisit closed matters in the course of reassessment proceedings under Section 147 of the Income-tax Act arguing that once the reassessment was initiated, the whole assessment could be reopened. The Supreme Court denied this argument, stating that the reassessment is limited to only escaped income and cannot be used to wholesale reopen concluded cases. Notably, the Court was careful not to interpret other judgments of the past in isolation as the Court noted that it is unacceptable to select a word or a sentence, out of the context of the question under review.
The Court stressed that a judgment should be read in its entirety and that it can only have binding effect on the questions actually determined. All these powers show that when a court is making or commenting on matters which are not being adjudged, such observations may not be made into binding precedents. By definition, they are obiter dicta, appeal at best but lacking in authoritative power. This limitation of doctrine is necessary to preserve the integrity of precedent, especially in tax law, where the context of statutes and factual matrices are extremely particular. In line with this, the ratio will only consist of legal principles, which are not only necessarily determined, but also directly so, in the process of adjudication and all ancillary observations, however considered in some detail, will be non-binding and cannot be applied to future cases.
Judicial Evolution on Nature of CCDs:
Whether CCD should be classified as a debt or as an equity has always been debated because of the difference between the general understanding of liability or debenture and the opinion expressed by the Hon’ble Supreme Court. General understanding is inspired by section 2 (30)[8] of the Companies Act 2013, which defines a debenture as a security that puts a company in debt, which implies a situation where the issuer is liable to pay interest on the security and later the principal is repaid.
In this regard, one of the earliest judgments of the Supreme Court in the matter of Narendra Kumar Maheshwari v. Union of India[9], wherein the court while ruling on matter related to capital issues control on issuance of securities, held in para 98 that as the CCD doesn’t result in repayment of principle amount, rather it’s a repayment in the form of equity. Therefore, it’s not a debenture in its classical sense.
However, contrary to the above ruling, the Authority of Advance Ruling (AAR) in AAR no. 769 of 2007 while considering the Hon’ble Supreme Court judgement in the matter of CWT v Spencer and Co.[10] held that a change in the character of repayment of debt from cash to equity cannot change the security issued by the issuer as equity.
Furthermore, this judgment of the Hon’ble Supreme Court was later distinguished by the Hon’ble ITAT Hyderabad in the matter of M/s. Fairfield Developments Limited v DCIT[11] wherein in para 6.3 the tribunal held that the Hon’ble Supreme Court decided with regard to guideline IV (i) r/w IV (ii) of the Guidelines for Issue of Cumulative Convertible Preference Shares and Guideline No. 8 and 11 of the Employees Stock Option Guidelines. These guidelines relates to Employees Stock Option Guidelines and Issue of Cumulative Convertible Preference Shares. This cannot be used as an authority that debenture also falls under the same category.
The Hon’ble Supreme Court recently in the matter of M/S. IFCI LIMITED v SUTANU SINHA & ORS.[12] held in para 24 that CCD should be treated as debt and not an equity, and this is because holding otherwise might lead to breach of the concessional agreement. While ruling on this issue, the court took note in para 12 of the judgment of the Concessionaire Agreement with the NHAI, where equity is defined as the instrument which can be compulsorily convertible into equity shares.
This judgement was later distinguished by Hon’ble ITAT Hyderabad in the matter of Hyderabad Infratech Private Limited v DCIT[13], wherein in para 17, while denying interference or ruling on the validity of the argument advanced as to whether CCD is a debt or an equity in light of the Hon’ble Supreme Court judgement in the matter of IFCI Limited. The tribunal held that the Supreme Court ruling is effective only to the extent of the specific contractual classification of debt or equity as made by the court, and the same cannot be applied to the present case, where TPO has already accepted classification as a loan, and it only relates to benchmarking of interest paid.
Conclusion and Recommendation:
In light of the explanation as cited above it is believed that CCD should be classified as debt or liability, as the same supported by Ind AS 32 and the judgments of Hon’ble ITAT. However, recently the opposite was upheld by the Hon’ble Supreme Court in the matter of Kalyani Transco v M/S Bhushan Power And Steel Limited And Others.[14] In that case, the issue was whether the obligation of upfront infusion of funds had been complied with as per the resolution plan after considering the funds infused through CCD. The court, while placing reliance on its own precedents in IFCI Limited and Narendra Kumar, held in para 148, held that CCD is not a debt but an equity. However, in this judgment, the Indian Accounting Standard 32 was not considered. Furthermore, the rulings cited were itself not properly dealing with the issue as to whether CCDs in general situation be called as equity or debt All the rulings were specific to the peculiarities of the respective cases and therefore are merely obiter dicta on the issue of treatment of CCDs and not ratio decidendi. Hence, these rulings could not have been relied upon to establish the true nature of CCDs in accordance with the rule of law that a judgement is an authority only for what it decides, as already established above. Moreover, change in mode of repayment does not imply that there was no repayment. Therefore, this Judgement of the Hon’ble Supreme Court needs reconsideration.
Reference:-
[1] Indian Accounting Standards – Compendium of Indian Accounting Standards and Ind AS Guidance Material ICAI, The Institute of Chartered Accountants of India, Accessed at: https://www.icai.org/post/compendium-of-indian-accounting-standards-and-ind-as-guidance-material. Accessed on: 14/04/2026.
[2] J.K. Industries Ltd. vs. Union of India [2007] 165 Taxman 323 (SC)/[2008] 297 ITR 176 (SC)/[2007] 213 CTR 301 (SC)[19-11-2007]
[3] Indian Accounting Standard (Ind AS) 32 | Companies Act Integrated Ready Reckoner| Companies Act 2013|CAIRR, Companies Act Integrated Ready Reckoner| Companies – Accessed at: https://ca2013.com/indian-accounting-standard-ind-32/. Accessed on: 14/04/2026.
[4] Arun Kumar Aggarwal v. State of M.P. (2014) 13 SCC 707
[5] Gerard Perira v. Income-Tax Officer 2016 SCC OnLine Mad 23008
[6] Jarnail Singh v. Lachhmi Narain Gupta (2022) 10 SCC 595)
[7] CIT v. Sun Engineering Works (P) Ltd. (1992) 4 SCC 363)
[8] The Companies Act, 2013, No. 18, § 2(30), Act of Parliament (India).
[9] Narendra Kumar Maheshwari v. Union of India, 1989 AIR SC 2138
[10] CWT vs Spencer and Co 88 ITR 429
[11] M/s. Fairfield Developments Limited v DCIT 2023 (6) TMI 29
[12] M/S. Ifci Limited V Sutanu Sinha & Ors., 2023 SCC Online Sc 1529
[13] Hyderabad Infratech Private Limited v DCIT, 2025 (4) TMI 83
[14] Kalyani Transco v M/S Bhushan Power And Steel Limited And Others, 2025 INSC 1165
Authors:
Lakshya Bansal |
Samarth Parag Gosavi |
