Can Compulsorily Convertible Debentures (CCDs) be issued under the Rights Issue?

1. Provisions relating to Rights Issues under the Companies Act, 2013

Section 62(1)(a) of the Act regulates the issuance of shares through a rights issue to the company's existing shareholders. Section 62 states that whenever a company with a share capital proposes to increase its subscribed capital by issuing further shares, then such shares shall be offered to persons who are holders of equity shares in the Company in proportion to their paid-up share capital. Whereas Section 42 states that a company may make a private placement of "securities". It is sometimes opined that CCDs are a hybrid instrument which shall be compulsorily convertible into equity shares and therefore is considered as an equity-like instrument and they argue that the CCDs can be issued under the rights issue.

2. Provisions relating to the issue of Compulsorily Convertible Debentures (CCDs) under the Companies Act, 2013

Section 2(30) of the Companies Act, 2013 ('Act') defines a 'debenture' to include 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. That is, a debenture is a debt instrument for the company.

Section 71 of the Act lays down the conditions attached to debentures. The relevant part reads as under:

(1) A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption:

Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting.

(2) No company shall issue any debentures carrying any voting rights…."

While the Act specifically provides for the issuance of convertible debentures, it also mandates that such issues must be approved by a special resolution. The fact that the Act deals with convertible debentures in the provisions relating to debentures, indicates that the statute seeks to regulate CCDs as debentures. Furthermore, debentures shall not carry any voting rights in the company.

As per Section 129 relating to Financial Statement read with Schedule III (General Instructions for Preparation of Balance Sheet and Statement of Profit and Loss of a Company) of the Act, a company is required to inter alia provide appropriate disclosures with respect to debentures and the rate of interest and particulars of conversion thereof.

A conjoint reading of Section 62(1)(c ) of the Act with Section 71 of the Act makes it clear that rights issues can be made of shares, and the issue of CCDs is proposed to be governed under the provisions relating to the issue of debentures. With this inference, it becomes clear that in Section 62(1)(c) read with Section 71, companies cannot issue CCDs on a rights basis.