Issuance And Compliance Of Optionally Convertible Debentures (OCDS) In India

Chaitanya Vaidya, Legal Advisor – Corporate and Real Estates Practice Areas

1. Background

Optionally Convertible Debentures (“OCDs”) serve as a significant financial instrument that companies utilize to raise capital from investors. Unlike conventional debentures, which strictly function as debt instruments, OCDs possess a unique feature that sets them apart. Specifically, OCDs provide investors with the option to convert these debentures into equity shares at a predetermined price. This price can be established either at the moment the debentures are issued or at the time the conversion is executed. This flexibility in conversion timing allows investors to make more strategic decisions regarding their investments, potentially enhancing the appeal of OCDs as a versatile capital-raising tool for companies. The option to convert into equity adds a layer of potential growth for investors, distinguishing OCDs from traditional debt instruments and aligning their interests with the company's equity performance.

As provided by the According to the provisions outlined in the Companies Act, 2013 (the “Act”) , Section 71(1), a company is authorized to issue debentures that come with an option to convert these debentures into shares, either in full or in part, at the time of redemption. It is crucial to emphasize that the process of issuing debentures with such an option to convert them into shares, whether wholly or partially, requires approval. This approval must come in the form of a special resolution passed during a general meeting. This requirement ensures not only transparency but also strict compliance with the existing regulatory framework. By mandating a special resolution, the Act aims to maintain a high standard of corporate governance and investor protection, thereby reinforcing the integrity of the capital-raising process through the issuance of Optionally Convertible Debentures.

In contrast to Compulsorily Convertible Debentures (“CCDs”), which require mandatory conversion into equity shares, OCDs offer a discretionary conversion feature. This means that the decision to convert OCDs into equity shares rests entirely with the debenture holder.